Roll up, roll up, euros at bargain prices

The Euro got cheaper against the US dollar and sterling as the ECB kept rates on hold and accompanied this with a familiar hawkish rhetoric at the accompanying press conference.

Markets flew in the face of Greenspan’s continued emphasis of the unsustainable US current account deficit approaching 6% of GDP, with the dollar surging against its major trading partners as dollar yen broke above the 117.00 barrier and euro dollar surged sharply downwards.

On the back of Trichet’s press conference the euro dollar swiftly broke through the 1.2050 level and trading below 1.1950 by late afternoon. In a similar vein, euro sterling collapsed through it’s previous pivot level of 0.6800 to create fresh lows marginally below 0.6750. Overnight euro gains against sterling have been limited to less than 20 points, with Eurodollar holding steady around yesterday’s lows.

Cable weakened in sympathy as key levels in dollar yen and Eurodollar were smashed through. From an early morning high of close to 1.7800, the pound tumbled through 1.7700 in overnight trading to test lows close to 1.7650. Following the pattern of the euro, gains have been limited and cable still trades below the 1.7700 figure.

An important factor of note is that Eurodollar is within sight of it’s year low of 1.1867, which was last seen on July 5th. This takes on even greater significance with the announcement of the US Nonfarm payrolls data this afternoon at 1.30pm GMT. Should we see a strong employment number for America, after the adjustments for recent Hurricane activity, could see Eurodollar trade towards these lows.

As Wise Money touched on in yesterday’s commentary, the decline across all states of 279,000 should be reversed with a small gain of 50,000 jobs.

The euro climbs ahead of todays ECB rate decision

The euro rose past Y140 against the yen and $1.20 versus the dollar as investors moved to anticipate any surprise eurozone interest rate rise today.

None of the 42 economists recently polled expect the European Central Bank to raise rates but a significant minority in the markets had a more hawkish view.

Even if they do not raise rates, the euro will push higher because the wise money thinks that there is going to be a very hawkish press conference and that will set the stage for a December rate hike.

Some economists expect the ECB to raise rates four times by the end of 2006 to 3 per cent from their current 2 per cent.

The euro climbed to Y140.91 against the yen, up 0.7 per cent but eased 0.2 per cent against sterling to £0.6795.

The pound benefited from the euro’s strength, climbing 0.8 per cent against the dollar to £1.7751.

The dollar hit a fresh 25-month high against the yen of Y116.99 after the Federal Reserve raised interest rates to 4 per cent on Tuesday, as widely expected. However it failed to push through Y117, gaining 0.1 per cent to Y116.79.

The language of the Fed’s accompanying statement was broadly unchanged from previous meetings and there was nothing to indicate that US interest rates will not rise further before the end of the year.

The Fed statement echoed the hawkish tone evident in September and provided no hint that the Committee might be close to an end to its tightening cycle. The euro/dollar curve did adjust to price in a bit more Fed tightening but adjusting interest rate expectations in the eurozone were helping to neutralize any Fed benefit for the dollar.

The euro climbed 0.6 per cent to $1.2061 against the greenback.

The Swiss franc climbed against the dollar, up 1 per cent to SFr1.2785 and 0.4 per cent on the euro to SFr1.5421. Swiss National Bank chairman Jean-Pierre Roth said current rates were not appropriate for an economy that was recovering, suggesting rates could rise when the central bank next meets in December.

The Australian and New Zealand dollars both weakened as the yield differential with their US namesake narrowed following the Fed rate rise.

Weighing on the kiwi were comments from Bank of New Zealand governor Alan Bollard that the exchange rate was exceptionally high. “In some respects this is unjustifiable; in time it will fall,” he said. The Reserve Bank of Australia on Wednesday held rates at 5.5 per cent.

The kiwi fell 1 per cent to $0.6916 and the aussie dropped 0.6 per cent to $0.7406.

Norway’s central bank raised its key interest rate by a quarter percentage point to 2.25 per cent to control growth in its oil-driven economy. Norges Bank said rates were likely to rise by another percentage point in 2006. The krone fell 0.1 per cent on the euro to NKr7.916.

All eyes on the ECB following US Fed rate rise

Having traded above the 1.7700 level yesterday morning, the US dollar fell below this level early afternoon and continued to a low of just above the 1.7600 level. Overnight sterling has rallied by 50 pips against the dollar and is trading around the 1.7650 level.

Eurodollar followed an inverse pattern to cable with early morning trading around the 1.2000 level before witnessing a move upward in the afternoon to test 1.2050. Despite a small overnight pullback, Eurodollar remains above the 1.2000 level this morning.

The culmination of these 2 currency moves, resulted in a sharp upward move in the euro sterling rate. From an early morning level of 0.6770, the afternoon saw the 0.6825 tested and this morning euro sterling remains above the 0.6800 level.

As was expected yesterday, the FOMC raised US interest rates by 25bps to 4%. This is the 12th consecutive raise and was a unanimous decision by the members.

This was very much expected, and in the accompanying statement the continued use of the word “measured”, as discussed in yesterday’s commentary, suggesting that the Fed is on course to raise rates again in December. Economists are suggesting that the US economy, in particular the housing market, must show serious signs of a slowdown for the Fed to finish its tightening cycle.

The other data from yesterday came in the form of the ISM manufacturing index. It fell slightly to 59.1 from the previous months 59.4. This further points to US growth expectations, and the inevitable view that we will see more rate hikes from the Fed as discussed.

Today’s data front is fairly quiet, with the German labour market figure and the European Manufacturing PMI the highlights. Expectations of the latter are for a further increase on the back of September’s stronger figure of 51.7.

With the FOMC decision out of the way, the market is now switching its focus towards the ECB meeting and subsequent rate decision on Thursday. There is now the prospect that the ECB is beginning to follow the Fed’s tack in a tightening bias. Economists are presently split on whether the ECB will hold rates this week at the present 2%, justified by increased inflation risks spoken about at the last meeting, or whether there is room for rate hike, following buoyant activity data.

Dollar strengthens ahead of the FOMC decision

Having struggled to get above the 1.7800 level yesterday morning, the GBP/USD spot rate quickly fell back below this level with good data from the US accelerating this Dollar strength, and the afternoon witnessed a low sub of 1.7680.

The Eurodollar followed a similar pattern with morning trading around the 1.2050 level before seeing a shift down on the back of the strong US data to below 1.2000. The euro followed the pattern of yesterday’s commentary and saw an open of just under 0.6800, with moves lower capped at only 30 points during afternoon trading.

Yesterday’s Personal income and spending figures from the US came in stronger than expected due to the impact of the recent hurricanes. The personal consumption expenditure price index rose 0.9% in September, the biggest increase since February 1981.

Excluding food and energy prices, however, the core personal consumption expenditure price index rose a more moderate 0.2%. Adjusted for inflation, real spending fell 0.4% in September after dropping 1% in August.

On the economic data front, the Nationwide house prices survey came in early this morning much stronger than expected. British house prices rose in October by 1.3%, their fastest pace for 15 months, which in turn pushed the y/y increase up from 1.8% to 3.3%. These figures are likely to boost expectations that the BOE will now keep interest rates at 4.5%, although Nationwide have said it was still too early to judge whether house prices were back on an upward trend.

This morning also sees the publication of the PMI manufacturing figures from the UK. Whilst output expanded in September, it is likely the October figures will be impacted by the appreciation in sterling and a surge in oil prices.

As Wise Money touched on in yesterday’s commentary, the key piece of data this week is going to be the US FOMC rate decision at 1915 GMT. Market sentiment is looking for a rate hike of 25bps to 4.00%. It is expected that the Fed will maintain a “measured” approach in the accompanying statement, indicating that they intend to continue lifting rates beyond today’s meeting at a steady pace into Q1 2006.

US loans rates rise occupies minds

Having opened at 1.7833, on Friday afternoon we saw the GBP/USD spot rate fall back below the 1.7800 support level trading at a low of 1.7721. This morning has seen Sterling fight back with moves back up towards the 1.7800 level.

The Eurodollar followed a similar pattern with morning trading around the 1.2150 level before seeing a retracement of 1 cent in the afternoon down to 1.2050. The euro was similarly on the back foot against sterling. The EUR/GBP rated moved down from its morning level of 0.6825, before settling sub 0.6800 during afternoon trading.

The key event of the week is the FOMC rate decision from the US. Expectation is that the fed is likely to raise rates by 25 bps to 4.00% and again next month to 4.25%. Whilst market sentiment suggests that the Fed is close to the end of its rate hiking cycle, US economists do not expect the Fed to sound less hawkish in the statement accompanying this week’s decision.

Going forward, the key issue will be how the market sees rate expectations affecting underlying investor sentiment. This applies to both the Fed and the ECB.

On Friday, key euro zone economic data came out stronger than expected. The combination of better sentiment indicators and hawkish ECB commentary has led the market to price in expectations of 2 rate hikes by the end of Q1 2006, which would raise the ECB rate up to 2.5%.

Today is a quiet day on the market data front, with the only data of note coming from the US in the form of the personal income and spending and the Chicago PMI figures. Expectation is for a PMI figure to pull back from the September’s figure of 60.5 down to 56. This figure still points to expansion, but at a slower pace than last month.

The Bank of Japan monetary policy meeting happens today, but there are not expected to be any significant changes in the current policy stance.