Aussie Dollar shines whilst US Dollar weakens further

More weakness for the US Dollar yesterday across the markets except against the Yen. 

This push on US Dollar weakness relented in later trading after the Fed beige book posted a slightly bullish report for the US economy. Today is a big day for the USD with the eagerly awaited retail sales data and corporate earnings reported by Intel…the USD will need good news from both to stage a recovery and prevent further selling pressure.

The big winner in the markets was again the Aussie. The catalyst was better than expected jobs data; the unemployment rate dropped to 5.5% from 5.8% from the month earlier as the number of people in work rose by 35,200 in December. 

Australia is the stand out performer of G20 nations and has rallied on stronger commodities and increased demand from China. It will be interesting to see if the RBA raise interest rates at their next meeting; if so we could see AUD/USD hit parity and GBP/USD mover into the 1.60’s.

Sterling has benefited on feedback from the National Institute of Economic and Social Research (NIESR) which yesterday estimated Q4 GDP at +0.3% and thus out of recession. 

However it was still the worst year for the UK economy since 1921. A good week so far for sterling which was initially buoyed by hawkish comments from MPC member Andrew Sentance. Surely we are due for some bad news now…or is it the start of a sustained rally?

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Financial markets lack direction

Yesterday we saw a bout of US Dollar selling pushing EUR/USD back to 1.45 and supporting the Pound in a run up towards 1.62. 

This ran out of steam in later trading as the markets became range bound with this pattern continuing so far today. Data from the UK today showed a reduction in the trade deficit and overnight we saw BRC retail sales come in at +4.2% year on year; both data better than forecasts. 

However it was not all good news for the UK as RICS December house price balance came in at +30 from +35 in November- the expectation was for +36 and this was the first drop since Feb last year.

Overall we have seen more positives coming from the UK data snaps and this should bode well for the Q4 2009 GDP data.

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Markets dry up for Christmas

As we get into December, so markets become less and less liquid.

This, combined with the lack of any significant data on Friday, left the technical traders very much in charge. 

Euro/Dollar obeyed the charts almost to the Nth degree with the closing support at 1.4610 holding even though we had seen slightly lower in late afternoon trading. 

Having broken the early November low of 1.4626 we are left with some fairly definite support and resistance levels to look at between now and the end of the year. 

There has been a considerable amount of trade around the 1.4700 level and this looks to be the initial Euro resistance level with last week’s high of 1.4780 the next resistance level. 

In a nutshell, if we don’t back up through 1.4800 in the next few days then the downside beckons. 

Recent moves suggest that short term trading will focus on being short of Euro with a target of 1.4450/1.4500 on the cards. This directional trade has been given impetus by what appears to be an improving relative economic performance from the US, which is in turn giving the Dollar a modicum of support.

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Sterling the star performer yesterday

Sterling was the belle of the ball in the currency markets yesterday gaining 1% against the US Dollar and the euro.

The positive trend was started wit the news that CPI data for the UK (a key indicator on inflation) came in unchanged at +1.8%. Although the inflation level is still below the 2% target a drop was widely forecast.

This was especially true against the BoE raising the QE programme by £50 billion and the feedback from the quarterly inflation report which noted that inflation was set to fall below 1%.

Sterling jumped on the news as the market digested a less dovish underlying data snap than the sentiment preceeding.

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Foreign exchange markets take a breather

Mostly sideways trading yesterday as Sterling and the euro failed to advance further against the US Dollar.

We did see a test of the key 1.70 level but if you blinked you may have missed it. US equity markets also struggled to find a direction swinging between gains and losses with the Dow Jones finally ending slightly up.

A pause is probably sensible now as news may materialize that the optimism is not warranted and the overheated markets will quickly retreat. We have a three-pronged event risk this week as we have the monthly BoE and ECB meetings on Thursday and also the payrolls report on Friday from the US. It seems the market will await further direction from these event risks.

UK July services PMI has come in at 53.2, up sharply from 51.6 in June, some way better than median forecast of 51.8. UK June industrial/manufacturing output data has come out at +0.5% m/m and +0.4% month on month respectively, stronger that median forecasts of flat and -0.1%.

So good news flowing from the UK economy this morning but the markets are yet to sustain a move above 1.70 on the USD or 1.18 on the euro.

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UK GDP weaker than expected

Sterling started strongly in early trading moving towards 1.6550 on the USD, 1.1650 against the Euro and testing 157 on the Yen.

We then had the release of UK second quarter GDP which gave sterling a cold shower dropping a full cent against the USD and slipping against most other currencies.

The GDP number came in at -0.8 against a forecast of -0.3- this brings the year on year fall to -5.6% and is the biggest year on year fall since records commenced in 1955.

The USD strengthened a little yesterday following comments from the Fed that they may not actually need to buy all of the bonds that it previously announced- this is effectively reining in the Feds QE measures.

If we look back as to the level of weakness that the USD experienced on the announcement of the fed printing money- we saw a move from 1.29 to 1.47. Similar hints sprung from the Bank of England as MPC member Andrew Sentence said that the MPC could pause it’s bond-buying program- this added support for sterling.

Other data out today came in positive for Germany as PMI data was stronger than expected at 45.2- up from 40.9 in June in manufacturing and 48.4 from 45.2 for services. French PMI was mixed as manufacturing improved but services dropped.

The main mover in the markets yesterday was the Japanese Yen which retreated against the USD, EUR and GBP. It seems Japanese investors are now looking at overseas assets and yield as confidence in the markets improves. GBP/JPY is up from 148 last week to 156 this morning.

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FTSE 100 goes into deep freeze

Markets have been quiet in the past but this morning is almost something different.

In two hours of trading the FTSE has managed to excite absolutely nobody at all after the Dow and S&P went into deep freeze yesterday evening.

With volumes draining away as dealers head off to the beach, there is a good chance that the current moribund conditions will continue for quite some time.

Watching the charts is rather a frustrating pastime, as even small moves look huge due to lack of any major scale with which to compare. The FTSE 100 has now been stuck in a 100 point range for seven sessions and today does not look like changing matters.

One ray of hope is that the Pound has gone for broke this morning and busted straight out of the recent trading ranges.

The 07.00 to 09.00 (UK time) trading period is becoming quite interesting, as Europeans turn on their screens and hammer the market one way or the other.

The high this morning at $1.6742 has been opposed quite strongly since it was hit at 07.21 this morning and we have slipped back to $1.6650ish with punters getting heavily short all the way up.

Those who have dealt with sufficient margin to avoid being stopped out on the way up may be hoping for a nice price correction back into the $1.6200 to $1.6550 trading range, but if we do not get back down there today the chances of a new range being set up are quite strong.

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UK inflation falls less than expected to 2.2%

UK inflation fell by much less than expected in May, lengthening the odds of full blown deflation, official figures revealed today.

The consumer prices index (CPI) measure of inflation, the Bank of England's target measure, dropped to 2.2 per cent from 2.3 per cent. Analysts had expected a fall to 1.9 per cent. This is the 20th consecutive month it has been above the Bank's 2 per cent target.

The alternative retail prices index (RPI) inflation measure, which includes housing costs and upon which many pay deals are based, has already plunged into deflationary territory. But it delivered another surprise, edging up from -1.2 to -1.1 per cent last month on the back of rising mortgage rates, confounding economists' expectations of a further drop to -1.5 per cent.

In another sign that prices are rising, core inflation, which strips out volatile energy and food costs, also rose from 1.5 per cent to 1.6 per cent.

The increased price of cigarettes and alcohol, which rose as part of April's budget, helped to push inflation upwards, the Office for National Statistics said, but significant increases came from the rising cost of DVDs, televisions, clothing and footwear- indicating that sterling's weakness is filtering through as foreign made goods become more expensive.

However, policymakers and analysts still expect inflation to fall sharply over the coming months.

Sterling jumped by 0.6 per cent against the dollar to $1.6414 after the figures were released, and rose to the highest level this year against the euro, which fell to 84.44 pence against the pound.

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Pound rises three cents to $1.64

The Pound rose 3.03 cents against the dollar yesterday as a survey indicated the British manufacturing sector could stop shrinking by autumn and hopes were lifted that the worst of the recession was over.

Sterling closed up at $1.6428, the highest level since October 21, and 20pc higher than its lowest 2009 level in January. It also rose 2 cents against the euro yesterday to close at €1.1602.

The pound was helped by the publication of the latest manufacturing Purchasing Managers' Index (PMI), which signalled a better-than-expected improvement in the sector in May.

The PMI rose to a 12-month high of 45.4 in May, up from 43.1 in April. It has been rising sharply since hitting a low of 35.1 in February. A figure below 50 marks a contraction in activity and above indicates a rise.

Production and new orders fell at the slowest rates for 12 and 14 months respectively, with larger companies faring better than small and medium-sized businesses.

Particularly encouraging was the new orders balance, which rose to 48.9 from 46.1 in April, which is likely to trigger a process of restocking following a period when manufacturers rapidly ran their stocks down to reflect the fall in demand.

However, new export orders fell at a faster pace in May, measuring 45.3 on the PMI compared with 49.5 in April. It is further evidence that a weaker pound in 2009 has so far failed to boost exports significantly, as demand in Britain's key export markets remains subdued because of the global recession.

Unemployment in the sector continued to rise in May but the pace of job cuts slowed, with the PMI employment index rising to 38.9 from 36.1 in February. Unemployment in the UK as a whole is expected to rise above 3 million in 2010.

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Sterling hits six month high against the dollar

Sterling reached its highest level against the dollar in more than six months as it took strength from an improved outlook for the global economy.

The UK currency closed at $1.6155 having earlier reached $1.6183 - on track for its biggest monthly gain since 1985.

Positive economic news from Japan and Germany, sent the dollar tumbling against a basket of currencies.

US stocks traded mainly flat after enjoying a promising start to the session with the release of data from the US Government which indicated that the recession could be on the turn.

Further data dampened earlier optimism with the Institute of Supply Management Chicago showed US midwest business activity slowing severely in May. Another survey showed consumer confidence in May was at its highest level since last September.

Government figures had earlier revealed that the US economy contracted slightly less than estimated in the first quarter. Corporate profits rebounded.

Gross domestic product, or total goods and services output within the US, dropped at a 5.7 per cent annual rate, the Commerce Department said, less than last month's 6.1 per cent government estimate. The economy contracted by 6.3 per cent in the fourth quarter.

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Bond markets defy Fed as Treasury yields spike

The US Federal Reserve may soon be forced to launch fresh blitz of quantitative easing whatever the consequences for the US dollar, or risk seeing economic recovery snuffed out by the latest surge in long term borrowing costs.

Yields on 10 year Treasury bonds have risen relentlessly since March when the FED first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

The US Mortgage Bankers Association yesterday highlighted the fragility of the US housing market, reporting that 12pc of homeowners are either behind on their payments or facing foreclosure, the highest level since records began.

Almost 6pc of "prime" borrowers are in arrears, showing how far the crisis has moved beyond the sub-prime. Most arrears are caused by job losses. The US unemployment rate has reached 8.1pc, and is even higher under older definitions, running at 15.8pc under Clinton-era metrics.

It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings.

The US is at the front of the firing line. Beijing is clearly losing its patience with the Fed's policy of printing paper, seen as a form of stealth default. There is some risk that further moves to step up quantitative easing could cause China to boycott US Treasury auctions. China and Japan together hold 23pc of all US federal debt.

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Wise Money radar set on Thursdays ECB rate decision

The European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25% last month.

A record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate.

The markets wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional "non conventional" measures- basically some form of Quantitative Easing to help the economy.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed's determination.

Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn't hear more soundbites about the stress tests. The results are likely to be made public later this week.

GB Pound is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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Pendulum again swings towards risk appetite

Yesterday and overnight we have experienced a broad sell off in the US Dollar as a return to global risk appetite kicked in.

GBP/USD is approaching the 1.50 level again after a good start to trading and EUR/USD has tested the 1.3350 resistance level this morning. Last night we had the FOMC decision and as expected interest rates remained unchanged at 0.00- 0.25% and the statement commented that rates will remain low for "an extended period".

Furthermore the FED stuck to their guns following the March announcement that they will still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

A similar theme in euro zone yesterday as we again saw improved confidence data against a downgrading of German GDP to -6.0% vs. -2.25% originally forecast. The euro is trading higher however as sentiment and focus on the improved confidence data helped the currency.

We also need to remember that the euro interest rates are higher than the UK, US and Japan and the increased risk sentiment into yield will help the euro. We can see similar gains when looking at other higher yielding currencies such as the AUD and ZAR which have all posted gains- particularly impressive is the ZAR- the USD against the ZAR has weakened from levels over 10 recently to 8.5 currently.

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What a difference a day makes

The equity markets surged higher after reports that Citigroup’s chief executive said that the US bank was profitable in the first two months of the year.

This helped the US dollar weaken across the board as risk appetite came back into play- a real turnaround for the heavily sold markets on Monday: also a real turnaround for Citibank who were rumoured recently to require more help from the government.

In the markets the dollar weakened against a basket of currencies but maintained strength against the pound and the euro.

The markets at the moment are mixed on the impact of printing money and currently it is being conceived as sterling negative due to the uncertainty and the de-stabilising short term effects it could have.

However on the flip side many economies may need to follow suit as policy easing will not be sufficient to increase money supply, therefore the UK may be ahead of the game- time will tell!

As the introduction of QE is new then undoubtedly the chatter and debate has spiralled with economists…in the words of George Bernard Shaw "If all the economists were laid end to end, they’d never reach a conclusion. " so let us hope that actions will be more effective than words on creating inflation.

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Zero rate interest rates

The Federal Reserve, at their meeting yesterday evening, cut the Federal Funds target rate (the rate at which US Banks can borrow in the overnight) by a massive 75bp to a range of 0% to 0.25% and was additionally very aggressive in the statement that followed.

The decision was unanimous amongst the Board, and the Committee expanded by stating that they were committed to keeping the rate at "exceptionally low levels" for "some time." Quantitative easing itself was not mentioned but there was reference to less conventional methods for the continuation of current policy.

Given that the rate is now essentially zero, economists feel like this was as aggressive as the Fed could get without getting into dangerous territory. Wall Street surged and the Dollar collapsed.

This morning, stocks have retraced and the Dollar remains weak. The outlook for the Dollar has to remain a little rocky in the near-term, more-so against the Euro than Sterling with a distinct possibility of seeing 1.4700 before the Euro tops out.

Sterling is struggling to keep up with the Euro so far which isn't surprising given that this morning's release of the minutes from this month's MPC meeting showed a 9-0 vote in favour of the 1% cut and that the committee discussed the possibility of making an even larger cut.

The Fed's action has now instilled in the market the view that the MPC will be compelled to act aggressively and likely sooner rather than later. the ECB, however, are seen to be dragging their feet especially given Trichet's hawkish comments that there were €˜limits to rate cuts. Sterling again hits an all time low against the Euro this morning.

Today we watch and wait. We have a CBI survey released later this morning and the interest rate decision from the Norges Bank this afternoon. Otherwise we will look to Wall Street opening as the catalyst for the next move.

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FED delivers an interest rate cut to 1%

No surprises as the Fed cut interest rates by 50 basis points to 1%.

They were joined yesterday by the Chinese and Norwegian central banks who cut rates by 27 and 50 basis points to 6.66% and 4.75% respectively.

It looks as if the Bank of England and the European Central Bank will keep us waiting for their interest rate decisions until next week.

On the foreign exchanges both the yen and dollar weakened further as risk aversion continued to ease, stock markets posted strong gains and expectations for further interest rate cuts grew ever stronger.

UK mortgage approvals rose in September for the first time in more than a year, after hitting a record low in August. Mortgage lending last month was more than twice market forecasts but that followed a downward revision to August which showed the first net repayment since the series began in 1993.

The BoE said mortgage approvals rose to 33,000 last month from a record low of 32,000 in August, the first rise since June 2007.

While the figure was marginally higher than expected, approvals are running at a third of their level a year ago, suggesting continued downward pressure on house prices. Net mortgage lending rose by £2.167 billion in September, more than twice analysts' forecasts, but the BoE revised down its August figure to show a fall of £691 million.

Consumer credit rose by just £251 million in September, the weakest rise since February 1994 and supporting anecdotal and survey evidence that consumer spending is weakening.

The Nationwide Building Society released its latest house price survey this morning that showed house prices fell 1.4% in October compared to a revised drop of 1.5% in September.

The annual rate of decline was 14.6% the biggest annual fall since comparable records began in 1991. On the upside September's fall was smaller than the declines reported in each of the previous three months.

In the US yesterday a report showed that US Durable goods rose unexpectedly in September by 0.8%, led by surging demand for defense goods and transportation equipment.

The jump in orders for durable goods - items intended to last three years or more - followed a revised 5.5% drop in August. Dealers were expecting a 1.2% decline.

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A much better day for equity markets all round as bargain hunters take stock

The dollar and the yen both fell back as shares made strong gains across all exchanges as equity traders chased bargains and currency dealers decided to take profits.

The yen plummeted against the dollar following reports that the Bank of Japan is considering a 25 basis point cut in interest rates in order to underpin the economy. Also weighing heavily on the dollar were reports that consumer confidence and house prices in the US fell sharply.

The yen suffered its sharpest one day fall against the dollar since 1974.

The dollar gained 5.3% to trade at 97.75 with the euro improving 7.3% to 124.36 yen. Sterling gained also benefitted despite expectations of lower interest on the back of a relatively positive CBI report.

Prices of US single-family homes plunged a record 16.6% in August with U.S. consumer confidence recording a record low in October as a worsening financial crisis made Americans anxious about their jobs and pessimistic about the future.

The Conference Board said its index measuring consumer sentiment tumbled to 38.0 in October from an upwardly revised 61.4 in September. That was the lowest reading since the index began in 1967. The previous low was 43.2 in December 1974.

Sterling held up well against the weaker dollar and the euro as UK retail sales fell less than expected in October.

The Confederation of British Industry's distributive trades survey balance stayed unchanged at -27 in October. Analysts had predicted deterioration to -35. The balance had fallen to -46 in August, its lowest reading since the series began in 1983.

All eyes today will be on the US Federal Reserve as markets await the FOMC rate decision due to be announced at 18:15 GMT with most analysts forecasting a 50 basis point reduction.

The probability of a coordinated rate cut today involving the Fed, the Bank of England and the European Central Bank is looking less likely.

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Emerging markets close to crisis

With increasing fears of a sustained Global recession developing, we saw European indices close sharply lower yesterday, with the FTSE closing down 5.7 percent, German DAX losing 4.9 percent and Frances CAC shedding 5.9 percent.

This was not reflected on Wall street where the Dow Jones Industrial average closed up more than 4 percent on the day. This was underpinned by positive earning signals from companies such as IBM, Google and Advanced Micro Devices.

There was also a feeling from some investors that certain stocks are cheap at these prices.

On the currency front, price movements remained volatile with poor liquidity , making it hard to find any near-term direction.

The US Dollar sagged against the euro but held steady against another perceived safe haven currency the Japanese Yen.

Sterling has climbed slightly against the Euro but has no real impact on the Dollar. At the time of writing Sterling/Euro trades at 1.2895.

Overnight oil rose more than $3, rebounding from a 15-month low below $70 on a late rally on Wall Street and growing expectations of an OPEC production cut.

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Stock markets remain main point of focus

Following the minor euphoria from the Joint activities last week, Stock markets again seem to be the main point of focus on the downside.

With further fears of recession, following poor British unemployment data (5.7%, its highest level in eight years), the Fed's beige book reporting weakened economic activity across all states and the U.S. government reporting retail sales falling 1.2% in September (biggest monthly decline in 3 years) this may have been enough to turn the markets negative.

But to ensure the markets did not stay positive/confident for too long Mr Bernanke stated that a marked slowdown will be seen in spending, investment and jobs. Also that market turmoil is a significant threat to growth.

These recession fears led to risk -averse selling with the US dollar benefiting from the purchase of U.S. assets, with the Dollar heading back down.

Also during New York trading we saw the Skandi currencies hit 2 yearly highs against the dollar overnight and this morning EUR/SEK hitting its highest ever official level over 10.000 to 10.1440 due to the lower risk appetite and low liquidity in periphery currencies

This morning we have seen an announcement that Switzerland's two largest banks (Credit Suisse and UBS) will receive billions of francs of emergency funding from the country's government and other investors to shore them up against the financial crisis.

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Wise Money's concerns rise over Fed bailout

Friday's dollar rally was replaced by yesterday's sell-off as jitters about the US government's $700bn bailout plan for the financial sector set in and investors mulled the inflationary implications of the government plan.

The greenback felt the pressure as investors flocked to precious metals and oil. USD experienced the biggest one-day drop against the euro since the currency was formed nine years ago, whilst sterling hit a 3-week high against the dollar.

The flight to commodities forced investors who were betting on falling oil prices to cover their short positions due to the massive surge in crude oil.

Failure to do so would have resulted in traders being obliged to take physical delivery of the oil. The largest one-day rise on record saw oil jump to an intraday high of $130 a barrel before falling right back to this morning's opening price of $108.

Meanwhile, Alastair Darling took the opportunity at Labour's Manchester Conference to speak about the "unprecedented economic challenges" facing the UK, saying that he was committed to restoring financial stability through more stringent legislation and regulation of the financial system.

The market will be watching closely as the terms of Hank Paulson's financial relief programme are unveiled. Both he and Federal Reserve Board Chairman Ben Bernanke are due to testify before the Senate Banking Committee today.

Market data will probably take more of a back seat once again, with the most likely market mover being the euro zone PMI survey for September.

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Investors weigh up the Feds rescue package.

Friday saw initial gains made by the dollar slip away as investors weighed up the effects of the US government's colossal takeover of bad assets from financial firms.

US Treasury Secretary Hank Paulson highlighted the requirement to address the root cause of the current financial turmoil. He called for a government sponsored package that would effectively remove the illiquid mortgage assets "€˜that are weighing down our financial institutions and threatening our economy".

Under the draft Treasury plans, any financial institutions with €˜significant operations in the US' are eligible to sell or auction their bad debts to the Treasury fund – this morning, the scope of the $700bn plan was widened to include assets other than mortgage-related securities.

Although the change to include other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress, George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions. Ben Bernanke and Hank Paulson will provide testimony to Congress this week.

Meanwhile, fears that Morgan Stanley and Goldman Sachs would not be able to survive the continuing pressure have been allayed by the Federal Reserve granting their requests to change their regulatory status.

Last night, both become bank holding companies, allowing them to take deposits from investors as opposed to using borrowed money “ the leverage that led to the undoing of Bear Stearns and Lehmans. The move concluded that there is no future remaining in investments banks now that investors have determined the model is broke.

The dollar fell against most major currencies, except the yen, as risk aversion receded. The weekend press emphasised that the implications of the US bailout plan could undermined the dollar due to the inflationary impact and the fact that US Treasuries would be less attractive to foreign investors and central Banks.

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The outlook for the markets remains unsettled

The Euro strengthened against the dollar yesterday despite poor economic data released in the eurozone.

As Wise Money posted yesterday the German Consumer confidence indicator published five year lows. Further gloom for Europe followed with Spain's National Statistics Institute announcing yesterday that Spanish house sales for the month of May slumped.

Spain who have experienced a real estate boom over the past ten years are now reporting house sales down by 34% year on year in May coupled with plummeting house prices. This continuation of negative news in the eurozone limits the ECB's scope to raise interest rates coupled with the inflationary pressures will most likely leave Euro interest rates fixed at 4% next month.

In the UK the Mortgage Approvals data will be released this morning, it is expected to highlight the downturn of the UK housing market and for a further month drop to new all time lows.

The Land Registry figures publicised yesterday reported that last month house prices in England and Wales fell by a further 1% marking the tenth consecutive monthly decline, with the London housing market the worst hit. This is evidence that the UK housing market is still in a downtrend. Sterling's only benefit at the moment on the currency markets is down to its relative yield advantage.

There is no escaping the housing gloom as the International Monetary Fund warned they could not see an end to the US housing crisis. The IMF expects further losses for banks with two mortgage banks declared insolvent already this week.

This data had a knock on affect on the dollar which steadied yesterday despite experiencing dollar strength over the weekend. Merrill Lynch gave weight to the gloom by proclaiming further write downs of up to $5.7billion in Q3. US stock market also felt the impact by dropping more then 230points highlighting that the severity of the current economic environment is not looking to settle.

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The Dollar rallied sharply yesterday on hawkish comments from Paulson and Plosser

With little in the way of economic data yesterday comments from Treasury Secretary Paulson and Philly Fed President Plosser were always going to be a key focus for dealers and neither man disappointed.

Henry Paulson churned out the familiar party line that a strong dollar is important to U.S. interests and the underlying strength of the economy while Charles Plosser said that rising inflation could force the Fed to start raising interest rates before labour and financial markets recover.

Oil also played a part in the dollar's rise as the price of a barrel of oil dropped $4.63 to a six week low of $126.40 as fears of tropical storm - expected to turn hurricane - Dolly hitting oil production sites in Texas receded.

Reaction to Paulson and Plosser was enough to offset an earlier slide in the dollar triggered by weaker than expected earnings announced by Wachovia. America's fourth largest bank reported a record US$8.86 billion second-quarter loss and slashed its dividend for a second time this year.

Wachovia had projected a US$2.6 billion to US$2.8 billion quarterly loss and added to the gloomy news by announcing it will slash nearly 11,000 jobs.

The jobs news does not bode well for the US non-farm payrolls report due out next week which has already shown that the US economy has shed a total of 438,000 in the first six months of the year.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling remains under pressure but manages to advance against a weaker Dollar

The Pound gained no rest bite yesterday as more bad news on the financial sector and property market deepened economic gloom.

Firstly there was HBOS who confirmed that shareholders subscribed for a mere 8.3% of shares in its rights issue, leaving the underwriters with almost £3.8 billion of stock.

Then we had property website Rightmove who reported its first ever annual fall in house prices since it began keeping records six years ago; prices fell 2% year on year to July.

Following comments from John Gieve and David Blanchflower highlighted in yesterday's commentary dealers will be looking very closely at the minutes of July's MPC meeting on due out on Wednesday to gauge whether any other members of the committee are moving towards easing monetary policy soon, which would further weigh on sterling.

A Reuter's poll of economists predicts that the MPC will have voted 8-1 in favour of rates staying on hold.

The dollar initially gained from news that Bank of America reported stronger-than-expected quarterly earnings but sentiment remains cautious and the dollar fell back sharply as poor company earnings reports in after hours trading from American Express, Apple and Texas Instruments triggered fresh dollar selling.

Adding too the negativity surrounding the greenback was a report yesterday from the Conference Board that showed that the index of leading US indicators fell 0.1% in June. This was in line with expectations but of more concern to traders was May's figure which was revised down to minus 0.2% from plus 0.1%.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Another day another Dollar- just weaker than yesterday!

Mr Bernanke will be talking today at his semi-annual monetary policy testimony before the Senate Banking Committee.

He will probably highlight the current concerns over the spiralling energy and commodity prices and their resultant effects on inflationary pressures. He will probably emphasise the urgent need to control these.

It is unlikely though, that we will see him give a clear indication as to when to expect interest rate rises in the US. The tone of his address however will say more than words ever can. The testimony, along with US PPI & Retail Sales (both due out around lunchtime) will cause traders to cut short their lunches today and be back at their desks prior to the 1.30 data release time.

Retail sales are expected to come in flat, a solid result considering the rise in unemployment and fuel prices. PPI is expected to rise, which won't be a surprise to anyone but will ensure that inflationary pressures remain at the forefront of minds.

A unanimous rate decision last night saw BoJ leave their rates on hold, this was expected and likely to have a neutral effect on the currency. They did imply in their statement that followed however that they would not hesitate to push rates up should conditions dictate.

In the EuroZone today the only data out is the ZEW survey in Germany. This is expected to come in lower than the previous release as the market sees Germany's industry weakening sharply on the back of higher oil prices, stock market losses and declines in monthly orders.

An article in this morning's Daily Telegraph in fact suggests that the EuroZone as a whole is in fact already deep into a recession with the likely result being that their economy will suffer even more than that currently being experienced in the US.

At home today we have already seen the release of the UK RICS house prices survey in which home sales fell to their lowest for at least 30 years - extremely weak.

The ratio of sales to stocks of unsold property fell from 19.4% to 18.2% in the three months to May, meaning that for every 100 properties on the market only eighteen were sold. We will also see CPI out at 09.30, with inflation expected to increase by at least 3.5% with the largest factor being the 5% increase in petrol prices.

With the all the interesting data out from the US unless there is a break over 1.6000 in EUR/USD we may not see much action. Another reason for the EUR to remain subdued may be the massive amount (€49Bn) Euro coupons and redemptions released in the Far East over the last two days.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bernanke's speech ignites Dollar jump.

After Europe's close we saw US Fed chairman Bernanke emphasise his concerns over inflation.

He stated the Fed would strongly resist an erosion in inflation expectations. This helped push the dollar to a three-month high against the yen (106.83). He also added that the latest surge in energy prices is adding to the dangers from inflation and that the risk of a substantial downturn in the U.S. economy has receded.

Wise Money also heard several other US officials saying they are keeping an eye on the dollar while keeping open the option of dollar-buying intervention to stem its slide.

This morning we have seen a release from the British Retail Consortium showing like-for-like retail sales have been the strongest in 4 months +1.9% y/y. Attributing warm weather for people splashing out on new clothes and summer food and drink.

This is the strongest reading since January this year,The BRC was proceeded by the RICS house price balance up at -92.9 in May from -94.7 in April. Also helping to painting a slightly brighter picture than of late in the UK economy.

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Oil price continues to strengthen

Global equity markets succumbed to a new sell-off at the end of last week amid jitters among investors over key economic releases and further oil price rises.

The US Labour Department on Friday reported a 0.5% increase in the unemployed American workforce (non Farm payroll) for last month, equating to 49,000 people losing their jobs.

This increase in the unemployment level was last seen in February 1986 and a level last encountered in October 2004.

Morgan Stanley (MS) issued a statement forecasting oil prices to breach the $150/barrel mark by July 4, this sent light sweet oil prices to $139 at the end of last week.

MS believe investors will continue to buy oil to hedge themselves against the foreseeable depreciation of the US dollar. The question is, how much this hedging is pushing the market against speculators pushing this oil price higher?

Closer to home the Bank of England is set to name its chief economist Charles Bean as deputy governor after a long standing dispute between the BOE and the Treasury.

This appears to be good news for Mr King as Mr Bean is his preferred choice of the two candidates.

In Europe it is well known that European central bankers have tended to follow the US Federal Reserve actions. However, comments made by Jean-Claude Trichet, ECB president indicated a misalignment in their interests.

Trichet signalled the ECB’s intentions to take a hawkish stance, by last week stating it was preparing to raise interest rates by 0.25% in July to curb the ever growing inflationary pressures within the Eurozone.

Trichet'€™s statement was soon followed by a 1.3% appreciation in the euro to 1.5749 US Dollars.

Sticking with currencies Sterling fell against the euro this morning which is the fourth consecutive day, dropping to £0.8014/euro. Against the dollar, it dropped to $1.9685, from $1.9708.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money asks if an ECB rate cut is wishful thinking

Prominent fears of stagflation (inflation and stagnation) appeared to contribute to the Sterling weakness against the US Dollar yesterday.

Not helping the GB Pound was the release of a Hometrack survey showing a fall in house prices in England and Wales for the eighth month running and a 40% year-on-year drop in April's mortgage approvals.

Across the pond the US Dollar experienced a lift following a report showing stronger than expected US new home sales data and a retreat in oil prices. This phase did not last long however as the EUR took the lead once again.

The US Dollar fell compared to the Yen and CHF following the FBI saying that a video will be posted soon urging Islamic militants to attack the West via biological, chemical and nuclear weapons.

Oil is the key at the moment for the greenback as they seem to move inversely in recent times. If we see a fall in oil prices inflation worries will quieten down and make investors believe the worst is over.

Recent data released in Europe gave reason for concern over the health and stability of its economy. The EUR suffered following a slump in French business confidence to a 2.5 year low and an unforeseen decrease in Germany's consumer morale for the month of June.

Investors are looking for action from the ECB and a change from its neutral perspective to dovish. However ECB members themselves declare this as "wishful thinking" and a different approach to its monetary policy is yet to be seen. Looking at the global economy market participants feel that the US has seen the worst of it and that Europe is only at the start of its economic slowdown.

The FED has adopted a very dovish tone since fears of a recession first appeared and tried to counter-act with rate cuts totalling 3.25 percentage points since September however with inflation now beginning to be the main focus the market will be looking for the Fed's next move to be an increase in rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US Dollar falls against euros

The dollar fell to $1.5678 yesterday, the most in a month against the Euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The rise in the Euro was in spite of a weaker than expected ZEW economic expectation figure out of Germany. Economists expected a gain to minus 37 from minus 40.7 in April; however the gauge declined to minus 41.6.

The Euro is also being buoyed by the continued hawkish nature of the European Central Bank and gained after the head of the ZEW centre and adviser to the German government Wolfgang Franz said "European policy makers may raise interest rates as soon as the financial crisis ends".

Wolfgang, one of the five advisers to the German government told reporters "I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over, then the ECB might need to raise rates to take care of inflation". Euro focus today will be on the IFO release for Germany.

Most attention today will be focused on the minutes from the FOMC and BoE. There is market speculation that the minutes from the April 30th FOMC meeting will suggest that the Fed is finished with its most aggressive easing campaign in decades after the 25bps cut down to 2.00%.

However there is still thought to be a considerable difference of opinion between policy makers and the minutes are eagerly anticipated as they ought to provide some sense of whether most members are more worried about the outlook for growth rather than inflation.

Minutes from the BoE meeting on May 8th are released today at 9.30. After late speculation that the bank would opt for another cut after a string of weak data released prior to the meeting, rates were left on hold at 5.00%.
The main focus today will be on the voting split between the members and the discussions that led to the unchanged decision. This should provide an indication of sentiment for the future and what we can expect in the short term.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world's largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England's (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Credit crunch weighs Dollar down

The dollar was trading in a tight range against the euro as fresh concerns about the global impact of the credit crunch prevented weak US consumer confidence figures pushing the greenback any lower.

The preliminary University of Michigan consumer confidence indicator for November fell to 75.0 from 80.9 in October, well below expectations for a reading of 80.0.

The figures are likely to boost expectations the Federal Reserve could cut interest rates again in December, with economists expecting US data over the next few weeks to come in on the weak side.

Unfortunately the situation is likely to deteriorate further given the ongoing deterioration in the housing market, the negative effects of falling equity markets and the erosion of purchasing power caused by the surge in energy costs, consequently we suspect the Fed will be forced into a December rate cut with rates likely to move below 4 % in the second quarter of 2008.

However, while gloom over the US economy weighed heavily on the dollar early on Friday, pushing it to a fresh all-time low against the euro of 1.4751 usd, markets were more concerned about the global implications of the credit crunch in the afternoon.

This meant the dollar was little moved by the confidence figures, with the greenback gaining some support as investors sold riskier high-yielding currencies. There was a significant pullback to 2.0855 against the Pound and 1.5651 against the Euro.

Rumours that UK banks have sustained heavy losses as a result of the US sub-prime crisis has caused risk aversion to rise, pushing the pound sharply off the recent highs and sending shares in London and Wall Street lower.

The pound's dropped sharply due to speculation of large losses in the UK banking sector, this in turn boosted the yen as increasingly cautious investors pull out of the risky carry trade, where they sell the Japanese currency to invest in higher yielding ones.

Nervousness in financial markets has also been exacerbated by reports that a collateralised debt obligation (CDO), a specialist security made up of repackaged debt owned by State Street Corp is liquidating its assets. Many CDOs contain assets linked to the troubled US sub-prime sector.

Elsewhere, expectations that the European Central Bank may tighten its monetary policy also weighed on the dollar. EBC President Jean-Claude Trichet last week described the dollar's weakness as "brutal."

The recent comments from policymakers in the major economies suggest that the monetary policy path in the near-term between the US and the other major central banks could diverge further. The ECB may raise its key interest rates by 25 basis points to 4.25 % in December.

The ECB last week kept its rate at 4 %, though the European Union has raised the 13-country euro zone's inflation forecast for 2008 to 2.1 % from 2 % this year. Consumer prices in the euro area rose 2.6 % in October from a year ago on record high oil prices. That was faster than September's 2.1 % gain.

Prices at the London open
GBPUSD – 2.0847
GBPEUR – 1.4235
EURUSD – 1.4643
GBPJPY – 229.99
GBPCHF – 2.3433
GBPAUD – 2.3158
GBPCAD – 1.9715
GBPZAR – 13.4263

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.