Articles from February 2006



U.S. and U.K. property prices in the spot light in lacklustre forex trading.

Sterling slipped against the Euro and dollar yesterday after data showed approvals for UK home loans fell to their lowest level in 12 months in January. But the pound shrugged off news from property consultant Hometrack that UK house prices rose for a third consecutive month in February and at the fastest pace since June 2004.

Mortgage approvals totalled 45,039 last month, 32% higher than January 2005, but weaker than December’s 51,233. Hometrack said that prices rose by 0.4% during February, bringing the average cost of a home to £161,700 although prices were still down 0.5% on a year earlier.

Sterling also hit a six-week low against the yen at JPY201.71 as the Japanese currency rallied on expectations that Japan will soon end its ultra-easy monetary policy and raise interest rates.

Meanwhile, sales of new homes in the U.S. fell 5% in January to their slowest pace in a year while the number of homes on the market climbed to a record high signalling a further cooling in the housing market.

The U.S. housing market has begun to show signs of cooling after a five-year rally that shattered sales and construction records, and sent prices soaring more than 50% on average nationwide. House prices, however, have been more resilient with Commerce Department data show the average house price rose 4% to $238,100.

Other data out later today includes UK consumer confidence data for February. Forecasts are for a fall in the index to minus 5 compared to minus 3 in January. Eurozone inflation data is due out this morning.

EU CPI is expected to show that consumer prices increased in January by an annualised rate of 2.4% well above the ECB’s target figure of 2% and would fuel speculation that the European central bank will put up interest rates at their policy meeting on Thursday.

US Dollar’s mixed reaction to oil and orders worries

The dollar was mixed on Friday, shrugging off a surprisingly weak report on U.S. durable goods orders and a spike in oil prices on reports of a foiled suicide bombing at a major Saudi oil facility.

The dollar was already trading up against the Euro, Sterling and Swiss franc and down against the Yen before the durables data and headlines from Saudi Arabia hit the wires.

The dollar’s negligible reaction suggests currency traders viewed both events as transitory; this data is generally volatile anyway, which prevents too much market reaction.

U.S. durable goods orders fell 10.2% in January from the previous month, much steeper than the 1% decline forecast by economists. But the details of the report weren’t nearly as soft, analysts said, noting that the headline number was in large part due to a fall in Boeing aircraft shipments and that December’s orders were revised up.

The yen remained well supported by expectations the Bank of Japan will soon end its ultra-loose monetary policy. BOJ Governor Toshihiko Fukui said on Friday conditions for a policy shift was falling into place, following up on upbeat remarks on Thursday which sent the yen higher.

Both the Canadian dollar and Swiss franc got a fleeting lift from the oil price spike — the Canadian dollar because Canada is a large oil exporter and the Swiss franc because of its perceived “safe-haven” status among investors.

But oil production in the world’s largest producing country was unaffected by the attempted suicide bombing, Saudi state television reported. Oil futures, which had risen 3% above $62 a barrel, pared gains to trade up 2% on the day.

Sterling fell against the dollar and held steady versus the Euro on Friday as expectations for lower UK interest rates faded. The pound was little moved after the UK’s quarterly economic growth rate for the fourth quarter of 2005 was left unrevised at 0.6%.

Earlier in the week, minutes from the Bank of England’s February meeting showed eight of the nine-strong Monetary Policy Committee voted to keep rates at 4.5%, confounding some market expectations for more votes for a rate cut. Bank of England policymakers are likely to take heart from a pick up in consumer spending growth shown in the GDP data, to its fastest pace in more than a year.

There is a plethora of economic data out this week including UK house price data from the Nationwide Building Society, German unemployment data and US Q4 GDP data on Tuesday, US personal income and spending data on Wednesday, ECB interest rate announcement on Thursday.

More on these numbers and other data due for release as we move through the week.

Sterling strengthens through key trading levels

Cable traded through significant resistance levels yesterday reaching highs approaching 1.76 only to have the dollar supported by a lower than expected jobless claims figure out of the US. A break in EURUSD caused the initial jump.

US jobless claims declined to 278k versus market expectations of a rise to 295k. The lower level can partly be attributed to the East Coast blizzard.

Fed President Santomero spoke before the CFA Society of Philadelphia focusing on long term potential growth. He commented that while the US are getting close to full utilization in the job markets, strong productivity is helping to contain inflationary pressures.

German IFO released yesterday came in firmer than expected. The headline index rose to 103.3 from 101.8 substantially ahead of market expectation and the main factor in the push of EURUSD through its key resistance. Improvements were seen in all sectors.

The data underpins expectations for further ECB tightening. EUR GBP remains under pressure after this week,s release of the Bank of England minutes prompted markets to factor in less likelihood of rate cuts in the UK.

Today we see the release of the second estimate of UK GDP and also Durable goods orders for Jan in the US.

Kiwi slide accelerated by high yields sell off

The New Zealand dollar extended its slide on Wednesday as its pre existing woes were accentuated by a sharp sell off in high yielding emerging market currencies. The latter trend, which was sparked by a sharp two-day slide in the Icelandic krona, hurt currencies from Latin America and Africa to eastern Europe and Asia.

And while the kiwi dollar was undoubtedly caught up in the sell-off, it seems perfectly capable of falling all on its own at present.

On Wednesday the kiwi fell 0.6 per cent to a fresh 17-month low of $0.6587 against the US dollar, taking its slide since early February to 4.6 per cent.

News from Japan, whose retail investors have been big buyers of kiwi-denominated uridashi bonds as they chase New Zealand’s 7.25 per cent interest rate, the highest in the industrialised world, was again negative.

Although the Japanese authorities denied they have asked Japanese banks and brokers to stop marketing kiwi uridashi, there were rumours on Wednesday that a bond launch had been aborted due to lack of demand.

And while most analysts believe the emerging markets carry trade has further to run, despite Wednesday’s wobble, few are optimistic about the kiwi.

Major currencies were once again little changed on Wednesday, with precious little to upset the status quo.

The US dollar initially ticked higher as US inflation came in at a higher-than-expected 0.7 per cent month-on-month in January as food and energy prices picked up.

However with the core inflation rate in line with consensus at 0.2 per cent, the data did nothing to alter monetary policy expectations, and the dollar settled back to sit 0.2 per cent higher at $1.7428 against sterling, flat at $1.1905 against the euro and 0.2 per cent softer at Y118.48 against the yen.

The yen appeared to draw a modicum of strength from the news that for the first time in a decade, a Bank of Japan operation to inject liquidity by purchasing Japanese government bonds failed to reach its target.

US loans rates to rise at least twice, ECB also suggests more rises

The FOMC minutes were released yesterday evening and the initial reaction was to focus on dovish aspects, which included sentiments that rates were close to neutral. The minutes also flagged changes to the language of the FOMC statement from further tightening “may” be necessary to “might” be necessary.

Does “might” imply less probability than “may” or is this just ‘Speechology’ justifying its existence.

The market still has a 95% probability priced in for a 25bp hike in March along with a 50% chance of a hike in May. Either way there is plenty of data to digest before either of these events.

Elsewhere, ECB board member Garganas made remarks to Trichet, repeating the view expressed that inflation risks have increased.

ECB member Wellink also this week urged the need for vigilance and confirmed that the Eurozone economy was gradually coming back on track.

Today we see the release of the Bank of England minutes where we widely expect a show of 8-1 no change despite rumours from a Sunday newspaper that the vote was 5-4. Such a disparity is unlikely, especially considering an recent optimistic Inflation Report.

There is a chance that one or two members voiced concerns about the extent of GDP recovery in the MPC’s central projection and will play up the downside risks. Either way the currency markets are expected to react.

Quiet day for currencies and Sterling

Very thin forex trading yesterday following President’s day in the United States and consequently the dollar remained unchanged against major currency pairs.

Looking at the recent weekly trend however demonstrates a slightly weaker dollar as there is a chance that positive data is no longer supportive for the dollar as the market has already priced in two more hikes by the Fed, evidenced by an unchanged USD following stronger PPI data last week.

The market will look for insight as to whether there is scope for further tightening beyond the anticipated 50bp in the minutes released today from the Fed meeting of the 31st January.

ECB President Trichet’s address to the European Parliament yesterday had little effect on the currency markets. Comments included warnings that upside risks to prices had increased and that it was perfectly sensible for the market to price in further rate hikes.

The Great British Pound was helped by comments by Kate Barker, a vocal member of the Bank of England’s Monetary Policy Committee, who downplayed the chance of an economic slowdown and noted signs of an acceleration in consumer spending.

Sterling has a lively week.

Following what was predicted to be an extremely interesting week for the currency markets, we open up this morning relatively unchanged from where we were this time last week, despite some volatility – GBPUSD had a weekly high of 1.7489 and a low of 1.7276.

Friday saw US Producer Prices rising by 0.3%, more than expected, compared to a revised 0.6% in December. The figure was higher in both the headline and core number and proved consistent with market perceptions that the Fed will remain cautious and pre-empt inflation with further rate hikes.

However, worth noting is that this price inflation is not being passed to the consumer, according to the CPI data of recent months.

The University of Michigan’s preliminary reading of its February consumer sentiment index fell 87.4 from 91.2 in January whilst consumer expectations for inflation remained at 3.0%. The figure was slightly lower than expectations and the dollar sold off accordingly.

Some of the negativity could have been related to the late January rise in energy prices and the news from Iran. Over the longer term energy prices are still heading lower so the market is relatively upbeat about forthcoming releases.

Dollar bounce as yield play increases/ UK disappoints.

The dollar reached a six-week high against the euro yesterday as a report showed U.S. home construction surged last month, reinforcing expectations for two more interest rate increases this year.

The dollar also gained versus the yen before Federal Reserve Chairman Ben S. Bernanke addresses Congress for a second day, after saying a sustained economic expansion may require higher rates to limit inflation. Traders raised bets the Fed will add to its 14 straight increases in borrowing costs since mid-2004.

Interest-rate futures show traders are pricing in a 98 percent chance the Fed will raise its target rate by a quarter- point to 4.75 percent on March 28. The odds of another increase on May 10 are 65 percent.

Higher interest rates in the U.S. have bolstered the appeal of owning the country’s financial assets over those of Europe, where the European Central Bank’s key rate is 2.25 percent, and Japan, where borrowing costs are almost zero.

In other news, U.K. retail sales fell the most in 13 months in January as consumers in Europe’s second-biggest economy reined in their spending after a holiday splurge.

Sales dropped 1.3 percent from December, after five months of gains, exceeding the median estimate of a 0.2 percent decline. The annual increase in sales slowed to 1.3 percent from a revised 4.3 percent.

Data for the day starts in the Eurozone, with the 10am release of December Industrial Production. After a solid 1.3% rise in November, look for a dip of -0.4% in December as the pre-released German figure fell 0.5% in the period. This would bring the YOY rate back down to 1.4%.

The remainder of the day’s focus is on the US, with a 1:30pm January PPI release, followed by a 2:45pm Feb Michigan Sentiment. Headline PPI is set for a modest 0.2% decline as Gasoline prices moderate, whilst core is set for a modest rise of 0.2% – a touch higher than current months, but still well contained. For the Michigan Sentiment look for a modest dip to 90.5 (from 91.2 in January) as US stock markets took a dip, and the pre-released ABC survey shed 4 points to -14 for the comparable period.

Mixed messages on UK and US loans rates rises

The much-anticipated Bank of England quarterly inflation report and accompanying press conference helped drive sterling to a high of 1.7491 as expectations for an interest rate cut were dealt a hefty blow.

The BoE said inflation was likely to remain close to its 2% target during the next two years. The Bank surprised the market by raising its central projection for GDP growth in the near term. The Bank’s central forecast is for the year on year growth rate to edge above 3% by the end of 2006 and to stay at this level for most of 2007.

Ben Bernanke who took over from Alan Greenspan this month as Chairman of the Fed gave his eagerly awaited testimony before congress yesterday afternoon. His testimony was relatively upbeat, “some further firming of monetary policy may be necessary” and was consistent with continued market speculation of a Fed rate hike at the March FOMC meeting.

He also emphasized the degree of monetary tightening that has already been achieved and discussed risks to growth. The implications are that volatility in the interest rate market is likely to be very high should economic data slow in the time leading up to the next FOMC meeting.

Treasury International Capital Data (TICS) came in at a worse than expected USD 56.6 billion for December from USD 91.6 billion in November. The decline was primarily due to less private purchases of Treasuries.

Foreigners purchased USD18.3bln in US Treasuries in the last month, down from the strong USD54.5bln result in November. Purchases of other asset classes were barely changed on the previous month.

Overnight the UK RICS housing market survey was released, this rose +9 in January from +8 in December which was the highest rise since June 04 and the third month in a row of improvement in UK house prices.

Today in the UK we have the release of Retail Sales for January. Expectations are for a year on year rise of 2.9%

Strong US sales increases the chances of further loans rates rises

US retail sales, released yesterday afternoon, came in at their highest level since 1999 at 2.3% for January, well above market consensus, and pushed expectations for further interest rate rises in 2006. The dollar as a result strengthened and sterling in particular felt the brunt of this force.

Sterling softened throughout the morning as the Inflation release at 9.30am came in below the Bank of England’s target level of 2%. The Consumer Price Index (CPI) for the year to January rose by 1.9%, the same as in December, which was revised down from 2%.

Sterling also weakened against the euro as EUR/USD managed to keep it’s head above the 1.19 level overnight and EUR/GBP moved back towards the .6860 level.

The euro got some support form Germany’s ZEW survey, which indicated that sentiment remained upbeat, but weaker than expected eurozone GDP did little to change expectations for a rate hike by the ECB on March 2nd.

There are two eagerly awaited events in today’s calendar. Firstly the Bank of England releases their inflation report at 10.30am. This will be closely watched for any indication of any changes in expectation for growth and prices.

The big event of the day happens at 3pm this afternoon when the new Chairman of the Federal reserve, Ben Bernanke has his first major appearance before congress. With a fair amount of further tightening now priced by interest rate markets, the USD could be vulnerable if he seeks to send a more dovish message and emphasize risks to growth rather than signs of continued momentum and price pressures.

However, a more open-ended, data dependent message on future policy prospects consistent with the last FOMC statement would leave the way clear for the USD staying firm for now.