Articles from October 2005

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.

Sterling rates up on weak dollar news

The US dollar remained weaker against sterling and the euro on the back of a slew of negative factors including speculation European interest rates may be raised, weak US September durable goods orders, and concerns about the health of US corporations.

A busy day ahead as all focus on US third-quarter GDP data due out this afternoon and euro-zone CPI inflation released this morning.

Yesterday, orders for new U.S. durable goods fell 2.1% in September, pointing to relative weakness in the manufacturing sector. The number was below consensus forecast, however some of that disappointment was mitigated by upward revisions to the previous month’s numbers.

September New Home Sales came in below consensus projections at 1.222 million compared to the estimates of 1.250 million. A more telling aspect of the data was the 3.2% downward revision of the August figure – 1.237 million – to a new 10-month low of 1.197 million. Rising costs of supplies and higher interest rates are contributing to the decline while further underpinning concerns for a peak in the housing market, with any slowdown subsequently seen as hindering to consumer expenditures.

EURUSD broke above key technical levels around $1.2140-50 – 38% retracement of the 1.2583 to $1.1874 decline as well as the 100 day moving average, as did cable, breaking through the 100-day moving average at 1.7850

The market today will be looking at euro-zone October CPI data, which is expected to stabilize below last month’s reading of 2.6% at 2.4%. Considering ECB’s preferred ceiling of 2.0% as well as this week’s strength in IFO surveys, the figures should shed more light on the possibility of Eurozone interest rate tightening.

Currency money rates spooked by markets

The US dollar was split, trading at two year highs against the yen but softer against Europe with cable breaking back through the 1.78 level with little fresh economic data.

The Japanese yen is under pressure following a further reduction in Japan’s merchandise trade surplus in September. The weakening yen has surprised the market in H2 with levels of 120 plus coming into focus following the breakout of the key 116 resistance level.

Japanese retail sales rose 0.1% in September from a year earlier, far short of a median market forecast for a 1.8% rise, suggesting that consumer demand may be slowing after leading Japan’s economic recovery since the start of the year. The move was also assisted by Japanese banks driving the euro toward stops above 140.00 yen.

The dollar traded weaker against both the euro and sterling, plagued by rumours that General Motors is seeking bankruptcy protection. The rumour reportedly stemmed from reports that US regulators are looking into General Motors Corp’s pension accounts and transactions with bankrupt parts maker, Delphi Corp.

A GM spokesman was later reported by newswires as saying the rumors were “untrue” and the news then changed to the possibility GM could be investigated for its accounting practices accelerated selling in the U.S. currency. GM said it had been subpoenaed by the U.S. Securities and Exchange Commission as part of a probe into its accounting practices and other matters.
Fighting this, the dollar still seems to be protected by familiar expectations of rising interest rates, beginning next Tuesday with a hike in the fed funds rate to 4.00% from 3.75%.

Money rates weaken on gloomy news

The dollar was punished across the board on a combination of slumping consumer confidence in the US and higher than expected business confidence in Germany. The dollar lost more than 1.5 cents against the euro hitting a week low.

Hawkish comments from Mervyn King in late European trade further cemented dollar’s losses as the bond market shifted on the back of King’s address to the House of Lords economic affairs committee.

Mervyn King insisted that “the wheels were not coming off” the economy, although it was driving along a “slightly bumpier road”.

King confirmed his view that official figures may not be giving a true representation of economic activity and any negative comments surrounding the economy are taking root from weakness concentrated mainly in the retail sector whereas we are still enjoying a healthy level of employment. On the back of these comments, it seems even more unlikely that we will be seeing any further rate cuts from the MPC in November.

King also went on to play down any concerns over divisions within the MPC after he was outvoted at the August meeting when the majority of the MPC favoured a 0.25% cut in interest rates.

In addition, ECB Governing Council member Axel Weber said on Tuesday that the central bank was on high alert for inflation dangers although it was not preparing for an imminent rate rise, adding further fuel to the EURUSD fire.

The euro gained more than 150 pips against the dollar following a 2.7 rise in the Oct IFO’s climate Index to 98.7 – the highest in 5 years. The situation index increased 2.5 points to 98.9 while the expectations index soared by 3 points. The survey was conducted after the resolution in this month’s election, which led to better clarity as to how power will be divided in Germany.

We saw last week how the Oct ZEW Indicator of Economic Sentiment rose following the resolution in the election. Whether the rebound in the indices reflects a relative improvement after the election or is a greater showing of economic expansion remains to be seen. The IFO climate index is now standing above its 7 year average of 94.1.

Dollar increases currency rates gains

Bush, yesterday, nominated Ben Bernanke, a leading monetary policy expert, to replace Alan Greenspan as chairman of the Federal Reserve at the end of January next year.

The dollar opened this morning slightly weaker, on the back of the nomination of Bernanke and a move not helped by the three bomb blasts in Baghdad. Going forward reaction should be positive due to Bernanke’s experience at the Fed as well as his intellectual capacity. His adherence to inflation targeting, however, has mixed prospects for the currency.

At the outset, pursuing explicit inflation targeting policy could deprive the Federal Reserve of its multi pronged policy of using an array of inflation-related figures at the prices and wages level. If a Bernanke led Fed adopts a more clear cut inflation target, then it could run the risk of over focusing on inflation at the possible expense of overlooking the Fed’s objectives of maximum employment and stable prices.

In the event that core inflation continues to threaten the 2.0% figure, then we can expect a positive dollar reaction on the grounds of further Fed tightening. But in the event of the disinflationary or deflationary conditions such as in 2003, the dollar is more likely to be facing downward pressure.

Dollar forex rates increases

Despite a bout of consolidation, the dollar gained around 1 percent against the euro last week and held familiar ground against sterling, driven largely by interest rate speculation.

The dollar found added support on Friday from several investment banks raising their forecasts for the peak in US official interest rates, and upgrading their US dollar forecasts in response to the International Monetary Fund chief, Rodrigo Rato, stating that the US Federal Reserve should continue to increase rates gradually.

The Fed has raised its benchmark interest rate at 11 successive meetings since June 2004, taking it to 3.75 percent, and many economists expect it to raise rates twice more this year to 4.25 percent, and probably more next year.

Still, some see chances increasing that the euro zone will raise rates, which would erode the dollar’s rate advantage. ECB chief economist Otmar Issing said on Friday that central banks have to be “extremely vigilant” against inflation, prompting speculation that the ECB may raise rates sooner than later and giving the euro some support. That was followed later in the day, however, by ECB President Jean-Claude Trichet’s comment that current interest rates were still appropriate.

Sterling forex rates increases

UK Retail sales came in above expectations for September, yesterday morning, led by a strong increase in food store shopping. Retail sales increased 0.7% from August and up 0.7% from September 2004.

Expectations were for an increase of 0.3%. August’s figure was also revised upward to 0.2% on the month and 0.1% for the year. Sterling took heart from these numbers and has continued it’s upward momentum this morning.

September’s positive retail sales number was a welcome respite after the weakness of the July and August numbers and last months report from the Confederation of British Industry, which reported the pace of UK retail sales fell to its lowest point in the 22-year history of its survey.

Elsewhere, the dollar ended the session weaker and has continued to weaken in overnight trading as The Federal Reserve Bank of Philadelphia’s business conditions index showed a strong but inflationary recovery and continued deterioration in the leading indicator of economic indices (-0.7% for Dec following a revised -0.1% prior).

A key release today will be the UK GDP first estimate for Q3 at 9.30am. The figure is expected to come in below trend at 0.4% for the quarter, which compares with 0.5% last time, making for an unchanged y-o-y rate of 1.5% and the fifth consecutive quarter of sub-trend growth.

This is an important number following the recent downward revisions that made Q2 GDP the weakest in twelve years.

Bank of England holds steady

The Bank of England minutes were released at 9.30 yesterday morning and showed all nine members of the MPC voted to keep interest rates on hold at 4.5% this month.

The minutes also revealed that the MPC did not even discuss the possibility of a rate cut, but were clearly worried about the impact of high oil prices.

As a result sterling strengthened as expectations for a rate cut before the year-end were scaled back but the pound does look to be on shaky ground as the argument for growth versus inflation rages.

Sterling has fallen almost 9% against the dollar this year with the fall being exacerbated by the BoE rate cut in August.

This morning at 9.30am in the UK we have the release of Retail Sales for September. Last months figure was very disappointing, coming in at 0.0% change versus the previous month, which was also a disappointing number. Expectations today are for a rise by 0.3% month on month and 0.20% on the year.

Bank of England’s minutes eagerly awaited

In the UK, eyes are focused on the release of the MPC minutes at 9.30am. The market will be looking to see whether the MPC is split between growth concerns and rising inflation.

Expectations are for 9-0 in favour of keeping rates on hold for the second month running after the committee was split 5-4 on its decision to cut rates in August. Yesterday’s CPI data showed annual inflation rising to 2.5% year on year.

This figure was slightly worse than forecast but possibly better than some feared after comments from Rachel Lomax on Monday about rising inflation and sluggish growth.

The US dollar has continued to strengthen across the board this morning, with USDJPY moving to within a whisker of 116 and EURUSD breaking through the 1.19 handle. Treasury International Capital (TICs) flows data released yesterday showed foreign investors appetite for US assets rising from $87.5bn in July to $91.3bn in August, which was significantly better than expectations.

Also released in the US yesterday, both headline and core Producer Prices rose more than expected and suggested inflationary pressures will increase.

The Oil price continued to fall this morning as the path of Hurricane Wilma is expected to miss oilrigs and refineries on the Gulf Coast.

Traders were concerned that Wilma could delay recovering US output ahead of the winter demand in the northern hemisphere. US crude was down $62.71 a barrel this morning falling since late August’s record-high of $70.85.

Dollar soars versus the Yen on money flows

The US dollar moved to a 2 year high against the Yen this morning as Japanese investors continue to buy dollars to invest in higher yielding debt.

The dollar was also firmer against the euro and sterling as the market continues to see the FOMC raising rates. Although hawkish comments yesterday from European Central Bank Chief Economist, Otmar Issing, has increased speculation that the ECB may also be looking at a rate hike.

Oil prices were also boosted by concern over Tropical Storm Wilma in the Gulf of Mexico, which could be declared a hurricane later today.

Rachel Lomax, Deputy Governor of the Bank of England said there would be tough choices facing central bankers in the coming months. Steady growth and low inflation over the past decade may have encouraged an unrealistic idea of what central banks can do to keep an economy on track while the current dilemma of sluggish growth and rising inflation raises it’s ugly head.

Ms. Lomax, who with Governor Mervyn King opposed the BoE’s August rate cut said there was a great deal of uncertainty about what oil prices would do but a series of oil shocks could push up inflation for an uncomfortably long period. All eyes this morning to the release of CPI at 9.30am. Expectations are 2.70% yoy.

House prices in the UK fell at their slowest pace for over a year according to the Royal Institution of Chartered Surveyors (RICS). The RICS survey also expected house prices to rise in the next 3 months. RICS said the BoE’s August rate cut to 4.5% had boosted confidence in the property market, but cautioned the pace of recovery was only gradual.

The Canadian dollar moved higher yesterday, helped by rising oil prices and expectations that the Bank of Canada will raise interest rates today.

Although US interest rates have risen at a more rapid pace this year the CAD’s exposure to commodity prices, particularly oil, has given the Canadian dollar the strength to move to 14-year highs late last month.