Articles from December 2005



US Dollar makes it’s biggest annual gain in 8 years

The US dollar ended 2005 with its best annual gains against leading currencies for eight years as the Federal Reserve’s ongoing rate raising campaign helped reverse the greenback’s three year decline.

The dollar trade-weighted index rose 10 per cent in the last year, against a fall of 27 per cent over the previous three years.

The dollar stood yesterday at $1.1790 against the euro, 0.4 per cent higher on the day, and more than 12 per cent higher over the year.

The small intra-day rise was put down to dollar repatriation by US corporates ahead of the year-end. It helped the dollar to post its largest annual rise against the euro since the single currency’s inception in 1999, and brought it within 0.5 cents of the euro’s $1.1747 launch level.

The dollar has benefited over the year from a switch in market focus from the ability of the US to finance its trade and budget deficits to a steady stream of rate rises from the Federal Reserve.

The dollar slipped 0.2 per cent to Y117.61 against the yen yesterday, with last-minute selling before the new year by US brokerages in Asia blamed for the dip.

However, this level represented a near 15 per-cent rise on the year, as the Bank of Japan kept short term interest rates pinned at virtually zero.

Sterling eased 0.2 per cent against the dollar yesterday to end the year at $1.7208. The Pound has lost over 10 per cent against the dollar in 2005 due to narrowing interest rate differentials between the US and the UK – the biggest annual drop since 1992 when the pound abruptly left the European Exchange Mechanism amid massive speculative pressure.

US Dollar holds gains after sharp rally

The US dollar was close to recent highs on Thursday following sharp gains in New York trade on Wednesday.

The rally saw the dollar gain a cent against the euro when a small initial move was amplified by the triggering of a succession of stop orders placed in the market by traders who had hit their targets for the year and were then keen to minimise their risk.

Yesterday the dollar held onto this new-found strength, settling at $1.1842 against the euro and Y117.81 against the yen. Currency traders have remained unperturbed over the recent inversion of the US yield curve – something that has heralded US recessions in the past.

However, the greenback fell 0.5 per cent to $1.7254 against sterling as the pound benefited from robust UK mortgage lending data, with approvals in November up 51 per cent on the same month last year.

Sterling also firmed 0.5 per cent against the euro and yen to £0.6862 and Y203.30 respectively.

The Taiwan dollar rose 0.6 per cent to a three-month high of T$32.855 to the US dollar as overseas investors continued to snap up Taiwanese equities. Foreign investors bought a net T$8.8bn of Taiwanese stocks yesterday, building on unusually large inflows of T$125.3bn on Wednesday, causing the currency to spike higher despite a reported attempt by the central bank to intervene by buying US dollars.

Euro rallies on strong German consumer data

The euro rallied strongly on Wednesday following a surprise jump in German consumer sentiment. The GfK consumer climate gauge for January rose to 3.8, beating expectations, with the December number also revised up and expectations for the year ahead rising to a three year high.

The report coincided with a barrage of recent data that has pointed to signs of modest economic recovery in the eurozone, an upturn that is expected to lead the European Central Bank to raise interest rates by at least a further 50 basis points in 2006 following December’s quarter-point increase.

As a result, the euro rose 0.6 per cent to $1.1889 against the US dollar, 0.7 per cent to Y139.85 against the yen and 0.7 per cent to a 10-week high of £0.6892 against sterling.

The pound had earlier made strong gains but sterling negative M & A related flows and selling of the pound by a European central bank were both cited as possible reasons for the turnround as sterling fell 0.6 per cent to SFr2.2619 against the Swiss franc and 1 per cent to A$2.3592 against the Australian dollar.

The Swedish krona rose 0.4 per cent to SKr9.4101 against the euro and 0.9 per cent to SKr7.9097 against the dollar, thanks to a rise in both Swedish consumer and manufacturing sentiment.

The krona has been a weak performer in 2005, falling 18.8 per cent against the greenback, as the Riksbank slashed interest rates to 1.5 per cent. However, an imp­roving economy is expected to prompt the Swedish central bank to start raising rates in the new year, offering support to the currency.

The US dollar drew little support from a strong December reading of the Conference Board’s consumer index, falling 1.4 per cent to $0.6811 against the New Zealand dollar (reputedly due to a short-squeeze) and 0.7 per cent to C$1.1637 to the Canadian dollar, with M&A; flows again the prime suspect.

US recession fears as long term bond yields fall

The possibility of a slowdown in the US economy weighed on stock investors on Tuesday after yields on 10 year US Treasuries fell briefly below those on two year notes, a rare event that in the past has often heralded a recession.

Longer term Treasury yields are usually higher than shorter term ones, because of the uncertainties involved in lending at fixed interest rates for longer periods. When the situation reverses, or inverts, it suggests that bond investors expect interest rates to fall, a trend usually associated with weak growth and low inflation.

According to analysts, the past six US recessions have been preceded by an inversion of the yield curve, which plots the yields on Treasury bonds against their maturities. The most recent inversion, in late 2000, came just ahead of the recession that began in March 2001.

Twice in the past 40 years, however, an inversion of the yield curve has not been followed by a recession. This is what many economists and Alan Greenspan, chairman of the US Federal Reserve, do not think this inversion is the prelude to a significant slowdown – even if it intensifies.

Many observers have suggested economic conditions today are more benign than those surrounding earlier inversions and that, while US economic growth may slow from recent levels, it is unlikely to turn negative.

Traders also warned against reading too much into market moves, with volume expected to remain light until the new year. Such activity as there was reflected technical pressures rather than economic fundamentals, as investors closed positions for the year.

Yields on 10-year Treasuries fell about 1 basis point, or 0.01 percentage point, below two-year yields in early trading. By the end of regular trading, the yield curve had normalised a bit with the 2-year yielding 4.343%, while the 10-year yield stood at 4.349%.

Whatever the growth implications, a period with 10-year yields below two-year returns could affect financial markets because many lenders fund their longer term lending by borrowing short term – a strategy that is unprofitable with an inverted yield curve.

After an initial rally, the Dow Jones Industrial Average retreated sharply to close down 1 per cent at 10,777.77. The S&P; 500 and the Nasdaq also ended the session off 1 per cent at 1,256.54 and 2,226.89 respectively.

Tuesday’s temporary slight inversion came as analysts were finally anticipating an end to the current Fed tightening cycle, which has seen short-term interest rates rise 13 times since mid-2004 to their current level of 4.25 per cent.

Fed officials, meanwhile, have argued that investors are now so confident of the Fed’s inflation-fighting abilities that they are demanding a lower long-term risk premium than in the past.

Strong demand for Treasuries from Asian central banks could also help explain why the prices of longer-term Treasuries have remained unexpectedly high and their yields low as the Fed has raised short-term interest rates.

Others have suggested that increasing globalisation has subdued inflation and with it investors’ expectations of future interest rates, making a relatively flat yield curve a less worrying signal than in the past.

Sterling slips as UK current account deficit balloons

Sterling and the New Zealand dollar continued their sell-offs for a second session on Thursday, while the US dollar fell amid talk of possible future US interest rate cuts.

The pound fell 0.6 per cent to £0.6829 to the euro, 0.9 per cent to Y202.78 against the yen and 0.2 per cent to $1.7398 against the dollar as the UK’s current account deficit spiralled to a record high in nominal terms.

The deficit ballooned from £1.36bn in the second quarter of 2005 to £10.2bn in the third quarter, equivalent to 3.4 per cent of GDP and approaching levels that could be “troubling” for sterling if UK interest rates were to fall significantly, said Mansoor Mohi-uddin at UBS.

The kiwi fell 0.9 per cent to a five-month low of $0.6723 to the greenback and 1.5 per cent to a two-month low of Y78.37 against the yen amid weak New Zealand growth data. GDP rose just 0.2 per cent in the third quarter, a quarter of the rate forecast by the central bank.

The US dollar fell 0.4 per cent to $1.1882 to the euro and 0.6 per cent to Y116.59 versus the yen as November inflation data undershot expectations.

UK loans rates look set to drop in 2006 following BoE minutes yesterday

It was announced yesterday that the Bank of England’s rate-setting monetary policy committee voted by an 8-1 margin to keep rates at 4.50 per cent. Markets had been expecting a unanimous vote, as has been the case since September.

This dissenting vote is likely to arouse expectations that a reduction will emerge in 2006, possibly as early as February. High Street activity in the UK picked up markedly in December it was said yesterday, the Confederation of British Industry said its volume of sales balance stood at 0 per cent, against -35 per cent in November and analysts’ expectations of a modest movement to -22 per cent.

This is the first time since February that the balance was not negative and the monthly improvement represented the biggest positive movement in 10 years.

In the US we had the third quarter growth which showed an increase of 4.1%, slightly lower than previous estimates of 4.3%. Despite the revision, growth in the third quarter remains the strongest since the first quarter of 2004.

Released today in the UK we have the 3rd estimate for the GDP for Q3, it is expected that the GBP growth will be unrevised at 0.4% q-o-q and 1.7% y-o-y. We also have the Current account data for Q3, it is already known that the deficit in trade in goods and services has broadened considerably in Q3 to ₤13.1bn (4.2% of GDP) from ₤9.9bn in Q2.

This has been motivated by a smaller surplus on services, showing repercussions of hurricanes Katrina & Rita and widening the deficit on goods. It is forecast that the current account deficit is going to widen to ₤7.6bn, which represents 2.4% of GDP.

In the US we have personal income and spending for November, personal income growth is expected to come in slightly lower than recent trend at 0.3%, particularly as payroll hours and wages were soft in November. Personal spending is also expected to rise 0.3% this includes the price impact of sharply lower gasoline prices. It is expected that core PCE deflator will rise 0.2% leaving the yearly rate at 1.8%.

The final data of the day will be US Jobless claims, last weeks initial claims were 329,000, at the current 4 week average. Showing that the impact of the hurricanes on new claims is no longer momentous. This weeks claims are forecast at 325,000.

Bank of England minutes to signal next move

Today all eyes will be on the minutes from the last meeting of the Bank of England’s Monetary Policy Committee, released at 09.30 GMT. The decision to hold rates at the last meeting is expected to be unanimous, and commentators will be watching closely to see if there is no support for further easing or hints at rate hikes in months to come.

This will be dependent more so on growth forecasts given good consumer indicators and the better global growth issues coming through, as opposed to inflation which appears to be a diminishing concern for the MPC.

Following BoE Chief Economist Bean’s dovish comments over the weekend that the MPC will react to data as it comes, markets will be looking to see whether the minutes give a clear direction either way.

Also out today from the UK is the CBI distributive trades report, of which a large percentage will cover the retail sales sector. Interestingly, the previous report showed a deteriorating retail market whilst office statistics revealed larger than expected rises.

Markets will be looking for some sort of gain from the previous figure of -35, but unless we see a move into positive territory this will be the 10th consecutive month that the figure has come in below 0.

The final important piece of data today is the US 3rd quarter GDP. This is the only major data from the states and eyes will be on whether the final reading remains the same at 4.3%.

UK house prices rise for first time in 15 months

UK house prices advanced in November for the first time in 15 months and will keep rising in 2006 as the Bank of England lowers interest rates to support economic growth, the Royal Institution of Chartered Surveyors have said.

The Bank of England cut the interest rates a quarter of a per cent in August to boost the economy, which is on course for its slowest growth in 13 years.

Industrial output in the euro zone fell 0.8 per cent in October from September it was announced yesterday, up 0.1 per cent year-on-year. Compared with a year earlier, non-durable consumer goods rose 1.1 pct, intermediate goods were up 0.8pct, capital goods posted grew 0.2 pct and durable consumer goods posted a rise of 0.9 pct, while energy output was down 1.6 pct.

Out today in the U.K. is public finances for November, it is expected that it will be announced that in the eighth month of the financial year, net spending was GBP8.0bn.

In the US we have November’s Producer Prices which is expected to have fallen 0.5%, the most in six months as energy prices retreat. Prices paid to factories, farmers and other producers are expected to fall 0.5 per cent last month after a 0.7 per cent increase in October. Finally we have the US November housing starts which is forecast to slow slightly to 1.96mn.

UK and US housing markets to provide interest rate clues

The outlook for housing markets in the US and UK and their impact on the wider economy provide an important theme for this week’s data releases. The link between property prices and wider economic activity is increasingly recognised by policymakers as a crucial factor for decisions on interest rates.

The downturn in the UK housing market this year contributed to weakness in consumer spending and is a big factor in sub-trend growth in the economy. How well the market and consumer spending will recover next year is occupying analysts.

Some negative influences, including the rise in interest rates and taxation, that have weighed on consumer spending this year should start to fade.

Wise Money expects to see stronger growth in household spending next year (about 3 per cent in real terms compared with the consensus forecast of about 1.8 per cent) contributing to a recovery in gross domestic product growth of 2.8 per cent.

Key to this view is the strength of the recovery in the housing market. The Royal Institute of Chartered Surveyors will publish its November survey tomorrow. October’s survey showed a sharp improvement, led by optimism about future sales, and higher levels of mortgage approvals also point to another increase in sales activity in the new year. City bonus payments will stimulate the top end of the market but real vitality still depends on the return of first-time buyers, priced out of the market last year.

House prices have stabilised at historically high levels and so affordability remains out of reach for many prospective homeowners, especially in the south-east of England.

Any upward revisions to third quarter UK GDP growth, due on Thursday, are expected to be modest and the more important details may be found in the data on real personal income growth and the savings ratio.

Prospects for the US housing market are increasingly seen as vital for the performance of the economy next year. Analysts fear the US market has become over-extended and this could pose a risk to consumer spending. US housing starts have exceeded 2m (annualised) over the past six months, a feat that has happened in only three other brief periods in the past 30 years. November’s data, due on Tuesday, are expected to show a modest retreat to 1.96m. New home sales hit a record high of 1.42m (annualised) in October, and November’s sales data, due on Thursday, are expected to remain robust at 1.35m.

Figures for US personal income and expenditure for November, due on Thursday, are expected to show the US consumer remains in robust health. Real incomes were growing at 2 per cent (annualised) in October while consumption growth was expanding at 2.6 per cent.

However, higher US interest rates next year will bring an increase in financing costs and the weakness of US households’ financial balances mean that economic growth could suffer as households try to rebuild their balance sheets next year.

A light week is in prospect for eurozone data releases. Industrial production is expected to fall by 0.5 per cent in November as weakness in France, Italy and Spain outweighs a strong rise in Germany. A decline in energy prices is expected to help German inflation ease to about 2.1 per cent in December from 2.3 per cent last month.

US CPI data logs it’s largest fall in 56 years

A fall in petrol prices led to the largest fall in US consumer price inflation, but stronger US industrial production figures balanced the data.

Strong US capital inflows and manufacturing data led the dollar to recover some of its losses on Wednesday against the Yen, closing at Y116.62. The pound slipped against the dollar to $1.7634 but remained stable against other currencies.

Retail sales in the UK came in stronger than expected for November, encouraging hopes of a rival in Christmas consumer spending.

Against the Euro the dollar advanced to $1.1960 from $1.1998, however the bullish sentiment for the dollar seems to have abated. Many now believe that expectations of Fed rate rises would seem remote.

Data out today include US current account at 13.30GMT. Deficit on goods and services was $183bn in Q3, from $173bn in Q2. Assuming the balance on income and transfers stays around $22bn, the current account deficit could widen to a record of -$205bn.

This would mean the deficit could end up at 6.5% of GDP, from 6.3% in Q2

Other data out includes German IFO business climate; forecast for business expectations is for 98.3 versus 97.7. EMU inflation data is due out at 10.00GMT. Inflation ex-food, energy, alcohol and tobacco. In October this figure rose from 1.3% to 1.4%. The figure preferred by the ECB is ex fresh food and energy was unchanged at 1.5% Forecast is -0.2% with the year unchanged at 2.4%