Articles from March 2006

Euro benefits from US Government rumours of weakenings

The Euro was flavour of the day yesterday, strengthening to nine day highs against the Dollar on the back of rumours circulating that the White House is looking for a weaker dollar. There are also rumours that Andrew Card, who recently resigned as White House chief of staff, is being lined up for a job in the US Treasury.

Aligned to this speculation was a report that US Treasury Secretary John Snow was about to be replaced as part of this shake up of top Bush administration officials.

Meanwhile, Sterling also benefited from the Dollar’s slide but continued to fall against the Euro, slumping to over seven-month lows against the currency.

Yesterday’s US GDP figure for the fourth quarter was largely ignored in the afternoon as the US government currency speculation took over. The final reading was revised slightly upward to 1.7%.

Today on the economic data front is rather busy, so here’s a few key notes to keep an eye on… The German retail sales figure for February has been released this morning, with sales falling 0.6% from the previous month.

Also already out this morning is the French unemployment rate for last month, remaining unchanged at 9.6% from January.

Due out at 11:00am BST we have the EMU Confidence survey for March. This is the European’s Commission’s best measure of industrial confidence in the Eurozone; a move higher here could lend further support to a rejuvenated Euro.

Sterling is weaker across the board

The GB Pound eased yesterday following continued pressure after the Fed signalled further moves to come on Tuesday but more significantly GBP economic data was weaker than expected yesterday.

The current account deficit was expected to show a big improvement to around 6.6bn however it was little change from the previous reading coming in just shy of 11bn. Further compounding the GBP woes was Q4 GDP which was unrevised at 0.6% qoq and February mortgage approvals slipped to its lowest level in 3-months and its first decline in 15-months.

In Tokyo trading earlier today the USD has succumbbed to some profit taking with the JPY and EUR benefiting most. The GBP has however failed to recover as much seeing the GBP/EUR rate slipping to around 1.4420.

Continued talks from the United Arab Emirates that they would look to convert more of their reserves to EUR also aided the EUR. Meanwhile the AUD and NZD also benefited from the USD profit taking regaining key levels of 0.7000 and 0.6000 respectively.

Today the market will be focusing on German unemployment data out shortly and US GDP and initial jobless claims later in the day. The market is expecting Q4 GDP to come in at 1.7% up from 1.6%.

Gold took advantage of the USD profit taking to hit a fresh 25-year high at USD 575.00 while silver hit a new 22-year peak of 11.19. Base metals are also on the rampage with Copper hitting all time highs.

On the energy front Oil moved to its highest level in 7-weeks following a report showing US gasoline supplies had recorded a sharper decline than expected.

Fed signals further loans rates rises from 4.75%

The big news yesterday, and what we had been waiting for, the US Federal Reserve raised rates by 25bp as expected but more significantly signalled that further hikes were on the cards.

The Fed’s statement was fairly upbeat as it notably avoided commenting on recent economic weakness – namely new home sales which recorded their biggest drop in 9 years – while issuing a positive view on the economy – “economic growth has rebounded strongly in the current quarter” and “the slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors”.

The USD benefited from the comments but the net effect was not as strong as it could have been following strong German economic data earlier in the day. The Ifo index came in at its strongest in 15 years pushing the EUR/USD towards 1.2100 and the GBP/USD above 1.7500.

Following the Fed’s comments the GBP/USD fell back to the low 1.7400’s and is currently in danger of dropping below this level – and while writing actually has had a brief did below. The EUR looks more vulnerable and is just managing to hold the 1.2000 level.

Any major moves are unlikely before UK GDP and current account data. The market will be looking for a narrowing of the deficit with any deviation from this – especially a widening – likely to move the market.

Elsewhere the USD/JPY moved higher following the Fed’s comments while the AUD and NZD are looking a little sick with the AUD struggling to hold 0.7000 but the NZD has already lost the 0.6000 level.

Gold moved around USD 2.00 lower in line with the USD strength with silver also easing, but still near 22 year highs but both remain supported by strong oil prices.

NYMEX crude finished down from daily highs but remains above USD 65 a barrel after the strong moves over the course of yesterday with supply concerns from Nigeria continuing to support the commodity.

All eyes are on the FED

The markets were as exciting as a Gordon Brown budget yesterday with traders sitting on their hands awaiting the Federal Reserve today. The GBP was little changed versus the USD moving marginally higher pushing towards the 1.7500 mark, while it also managed a small gain against the EUR breaking through the 1.4500 level.

The market has priced a rise of 25 bp, the 15th consecutive rise, to 4.75% as a dead certainty with expectation for the Fed to also add another 25bp by the middle of year. As mentioned yesterday however it will be the comments from Fed President Bernanke, who is chairing his first meeting since taking over from Greenspan, which the market will be focusing on.

Any rhetoric that suggests the Fed may be coming to end of its tightening policy could harm the USD.

The market showed little reaction to comments from the Chinese Central Bank that the bank would let the domestic market play a bigger role in the forex system. Today the market will also be focusing on US consumer confidence data and the Ifo business data from Germany could influence the EUR.

The JPY gave up some of its repatriation generated strength in late US trading which also aided the tumbling AUD and NZD. The AUD and NZD managed to regain significant levels after hitting 18 and 22 month lows respectively but again the potential Fed comments will have a major influence on short term movements. The EUR was little changed on the day.

On the commodity front, silver continued to hover around 22 years highs while gold managed to gain yesterday moving up to USD 566.40. In AUD terms gold broke through the AUD 800 level continuing on after breaking the all time high of AUD 766 set in 1980.

Base metals are also benefiting from the strong silver price with Copper and Zinc at all time highs. Crude oil held above US 64 on continued Nigerian supply issues after being weighed down by strong US crude stockpiles.

Dollar buoyant following strong US housing data

With clocks moving forward an hour for Summer-Time over the weekend to take advantage of the alleged English sunshine; it was also time for the GBP which took advantage of weaker than expected US data on Friday moving back above 1.7400. The USD had strengthened across the board on Thursday following an unexpected increase in existing home sales, but gains were erased after new home sales recorded their biggest decline in 9 years.

Elsewhere the JPY gained nearly 1% against the USD as Japanese investors went into buying mode ahead of their financial year end. This buying by Japanese investors also heaped more pressure on the ailing AUD and NZDs.

All eyes this week will be on comments from the US Federal Reserve following Tuesday’s expected interest rate increase. Interest rates are expected to increase by 25bp for the 15th consecutive month to 4.75% but the market will be more interested to see if the Fed comments flag continued interest rates increases or a change to the current tightening policy.

Other data to watch during the week will be US consumer confidence on Tuesday, UK GDP and Current Account stats on Wednesday, while US GDP and initial jobless claims will on Thursday are also potential market movers.

On the commodity front, silver rose to its highest level in more than 22 years but gold failed to take advantage of the weaker USD and eased marginally to USD 559.90.

Meanwhile oil prices are hovering near seven-week highs with renewed concerns over Nigerian Production. US light crude is currently at USD 64.19 a barrel just shy of Friday’s peak of USD 64.75.

US Dollar buoyant following strong housing data

The US Dollar extended gains yesterday following stronger-than-expected US housing data. Sales of existing US home sales rose by 5.2% in February to a seasonally adjusted annual rate of 6.91 million units.

Analysts said that this boost in sales was probably due to warmer than usual weather in January, when sales that were closed in February were initiated. Interesting human behaviour isn’t it? We’re more likely to go house shopping when it’s a nice day!

Alongside yesterday’s housing data, the average price for an existing home in the US rose 11% in February from a year ago to US$209,000. This surprising jump in home sales suggests the Fed Reserve could keep raising interest rates longer than expected, hence the support for the Dollar.

Wall Street reacted unfavourably to the news however, as concern over higher interest rates could slow down economic growth and dampen corporate profits.

On the data front today, we look to US new home sales for February with a slight drop expected here, from 1233K in January to 1200K last month. Any positive figure here would lend further support to Dollar resurgence. Also from across the Atlantic today we have the US Durable goods orders for February. After January’s decline of 9.9%, markets expect a considerable rebound of around 1.0%. Again, the Dollar will be the major benefactor of anything greater than this.

On the commodity front, oil prices jumped 3 percent yesterday following uncertainty over Nigerian export facilities. Gold seems to have found a home around the $550 an ounce level, at the same time silver futures touched a fresh 22-year high of $10.69 an ounce.

On the economic data front today it’s very quiet from the UK & Europe, but as mentioned earlier, a couple of vital pieces of data from the States this afternoon.

Sterling holds steady following UK Budget report

Sterling held steady yesterday after UK Chancellor of Exchequer Gordon Brown maintained this year’s economic growth estimate in his annual budget statement, which contained little surprise for the currency market.

Brown said the economy would grow by 2.0-2.5 percent this year, unchanged from the estimate he gave in December’s pre-budget report. He added growth would then pick up to 2.75-3.25 percent in 2007. Chancellor Gordon Brown took centre stage to deliver the country’s annual budget yesterday and left David Cameron, his likely rival at the next election, looking short on substance. Confounding his hard-faced image, Brown cracked jokes in a confident speech setting out his plan for the country’s future.

The budget debate was the first time Brown had squared up to Cameron in parliament. The conservative leader attacked Brown in a short feisty speech – branding him an obstacle to change and accusing him of living in the past. However, that said it seems Cameron did little to shake off the image that, in spite of good marketing and slick speeches, he was still short on policies to challenge Labour.

Stephen Nickell remained the lone voice on the Bank of England’s Monetary Policy Committee calling for a rate cut, as the rate-setting body voted 8-1 to leave rates unchanged at 4.50 percent as expected.

This was the fourth month running that Nickell, who’s term in the MPC is due to end on 31st of May, called for a rate cut.

The majority disagreed, however, arguing that it was appropriate to leave rates unchanged given that the outlook was, on balance, for continued growth near trend and inflation close to target. In the end, the minutes suggest that UK rates will stay put for the time being unless the economic backdrop changes significantly one way or another.

UK CBI Industrial Trends for March are released this morning at 11.00am, with confidence in the manufacturing sector markedly improved in February, a result of stronger export and domestic orders. A renewed rise in input prices may put a squeeze on margins. Overall it is expected that there will be a small drop in both orders and expectations at +6.

In the US today there are US Jobless claims for week of 18 March, with last week’s claims at 309k, the 4-week average edging higher to 297k. This was up from 277k in early February but is still consistent with a stronger labour market. Claims this week are expected to come in at 295k.

The last piece of data out today is US Existing home sales for February, which are expected to fall for the sixth consecutive month, adding to evidence of a cooling housing market. Home resales are forecast to decline in February to an annual rate of 6.5 million from January’s 6.56 million. Sales of both new and existing homes may fall this year for the first time since 2000 after five years of record gains.

Dollar gains on weakening forex emerging markets

The Icelandic krona fell nearly 3 per cent on Tuesday after Danske Bank warned there was a “substantial risk” of a financial crisis in Iceland and of a 25 per cent fall in the currency. In a toughly-worded report, the bank said that Iceland had seen a “stunning expansion of debt, leverage and risk-taking that is almost without precedent anywhere in the world”.

If Icelandic banks continued to face strongly rising funding costs, “the result is likely to be a sale of foreign assets by Icelandic banks and Icelandic corporations,” the report said.

Financial crises in the past decade in Thailand and Turkey had resulted in currencies weakening by 50 to 60 per cent, Danske bank noted. “We would not rule out the possibility that the Icelandic krona could weaken by a similar degree,” although it pointed out that the currency had already weakened by about 20 per cent.

Dollar strength was also weighing on emerging currencies as monetary tightening expectations in the US rose. This drove gold down to $547 a troy ounce, in turn pushing the South African rand 1 per cent lower to R6.3313.

Two notable sell-offs in the krona in the last month have presaged wobbles in other emerging currencies and there were signs again of weakness on Tuesday with worries of a global liquidity crunch weighing on the currencies of countries with large current account deficits.

On Tuesday, the Hungarian forint dropped 0.9 per cent to Ft264.43 against the euro. The forint has been weighed down by political uncertainty with no signs of any supportive monetary tightening after the central bank left interest rates at 6 per cent on Monday. The Polish zloty fell 0.4 per cent to 3.896 zlotys amid the uncertainty of a possible snap election.

Core US producer prices beat expectations, rising 0.3 per cent last month, ahead of the 0.1 per cent predicted. This pushed the yearly index up 1.7 per cent, from an increase of 1.5 per cent in January.

Late on Monday Ben Bernanke, the new chairman of the Federal Reserve, delivered an address on the US economy broadly adjudged to be upbeat.

Mr Bernanke argued that consumer finances were consistent with “reasonable” growth in consumption, “enough to keep the economy at or close to its potential output growth rates”.

Mr Bernanke also echoed Alan Greenspan, his predecessor, in asserting that the flat US yield curve was not an indicator of a significant economic slowdown. Indeed, he argued that unusually low long-term yields were a positive as they offered a stimulus to support economic activity.

The futures market reacted by raising the probability of the Fed following up a widely expected quarter-point rate rise at the end of March with a further hike to 5 per cent in May from 74 to 86 per cent.

The dollar added 0.8 per cent to $1.208 against the euro, 0.8 per cent to Y117.21 against the yen and 0.6 per cent to $1.7457 versus sterling.

The pound initially fell after UK inflation data came in in line with expectations, strengthening the view that UK interest rates will remain on hold for the rest of 2006, leading to a deterioration in the UK’s relative yield position as rates are raised in the US, eurozone, and, potentially, Japan.

The pound rebounded however, rising 0.3 per cent to £0.6918 against the euro, having come within a whisker of a seven-month low just after the data, and climbing 0.4 per cent to SFr2.275 against the Swiss franc.

Bad news for Gordon Brown ahead of the Budget Report

UK public finances deteriorated in February following January’s record surplus it was announced yesterday. Chancellor of the Exchequer Gordon Brown received unwelcome news ahead of tomorrow’s budget report as worse than expected public finances figures for February look set to dampen hopes that he may be able to achieve his forecasts for the current fiscal year, figures showed.

The figure comes well below expectations of around GBP0.7bln at GBP2.3bln – the highest borrowing for February since 1997.

US Federal Reserve Chairman Ben Bernanke, in his first public foray on Wall Street, offered conflicting signals on interest rates but said the economy should keep growing at a brisk pace. Bernanke’s speech was his last scheduled appearance before the Fed meets on March 27-28 to decide whether to increase interest rates for a 15th straight time by a quarter-percentage point, to 4.75 percent.

The Fed chairman’s optimistic outlook for the economy, and his view that homeowners can absorb a slowdown in the housing market without too much strain, suggesting rates will move higher.

In the US yesterday it was announced that leading indicators fell 0.2% in February, which ended a string of increases that ran on for four months in a row, possibly signalling that the economy may continue to expand this spring before slowing later in the year.

Out today in the UK is February’s CPI which are expected to rise 2 percent from a year earlier, after increasing 1.9 percent in January. Rising oil and natural-gas prices are driving up costs for companies and consumers. In the US, February’s PPI are released which are expected to decline 0.2% for the month, falling to 5.0% from 5.7% y/y.

Dollar feels renewed pressure in the spotlight

Following last week’s poor US current account and capital inflows data which saw the big Dollar fall over 3 big figures during the course of five days, pressure remains firmly on the USD. Last Friday’s trade was relatively quiet, as markets now focus on new and existing home sales data due out later this week.

Future interest rate rise expectations in the US may hinge on the housing numbers, weak results here will put renewed strain on a struggling Dollar.

The euro zone cost of labour rose a provisional 2.4 pct in the fourth quarter from a year earlier, compared with a revised 2.3 pct rise in the third quarter it was announced on Friday.

In the US industrial output increased 0.7% in February as cooler weather boosted utility production, the Federal Reserve said on Friday.

Out today we have the UK Public finances for February which is expected to be a small net spend of GBP1.6bn, similar to the same month last year. Increasing net borrowing so far this financial year would be GBP31.3bn. with one key spending month to go, the Treasury is expected to meet its revised cash requirement for the full year.

In the US today we have the Leading Indicators for February with it forecast to fall 0.3% after rising 1.1% in January.

On Wednesday Chancellor Gordon Brown delivers his 10th budget, and given his political ambitions to become the prime minister, this could possibly be his last. The budget is likely to reside heavily on his achievements and is not expected to deliver any significant tax changes ahead of the next year’s comprehensive spending review.

Also released on Wednesday is the Bank of England minutes from its last policy meeting and it is expected to have voted 8-1 in favour of keeping interest rates on hold at 4.5 per cent.

Other data out this week:
UK – CPI (February)
US – Producer Prices (February)
UK – Bank of England minutes
UK – Budget Report
UK – CBI Industrial Trends (February)
US – Initial Jobless claims (week 18 March)
US – Existing home sales (February)
US – Durable goods orders (February)