Articles from May 2006



New US Treasury Secretary announced, as dollar bears mount

Hank Paulson, the chief executive of investment bank Goldman Sachs, was named as the new US Treasury Secretary yesterday. Paulson has extensive links with China and is widely acknowledged to be better equipped at encouraging Beijing to allow a faster appreciation of the renminbi, than his predecessor Snow.

The US has had real concerns over global currency imbalances and the Paulson appointment could reinvigorate discussions to persuade renminbi appreciation.

The strong dollar position could very well be assigned to history for the near term. The dollar had initially fallen yesterday but firmed on the back of the news, only to fall to new lows later on. The greenback was down 1% by mid-session against the Euro and 1.3% against sterling to $1.8818, while it traded at 28 year lows against the Canadian dollar to C$1.0995.

Oil prices continued their upward trend pushing above $72 a barrel as traders returned from the long weekend. This came on the back of further data which showed that China’s demand for oil rose at it’s fastest pace for two years in April. This posts consumption at a wopping 10.8% year-on-year increase, without any signs of it abating.

Gold rose 1.2% to $657.70 a troy ounce, buoyed by dollar weakness. Many analysts predict a retracement back towards $500 however, since volatility had hit jewellery demand significantly.

Key news out today include the US FOMC minutes. In its May 10th statement the FOMC kept the phrase “further policy firming may yet be needed”. The inclusion of the word “yet” into the line indicated that they would lean towards a pause in rate rises given the chance.

Consumer confidence figures are also out today in the EMU, the UK and France. Euro wide look for some softening in the figures.

Dollar down on news of possible Snow successor

The dollar has fallen against the Yen and Euro, amid reports that Don Evans, a highly likely successor to the US Treasury Secretary John Snow, would favour a weaker dollar. Evans, a former US commerce secretary, would fit the traditional approach of the last 30 years, and seek to encourage exports through a weakened currency. Republican sources in the US said last week that Snow is likely to step down from the position in June.

Financial markets were reasonably quiet yesterday as the US and the UK were both enjoying a holiday. A week of heavy market data is due out of the states, with the prospect of higher global interest rates remaining uppermost in many investors’ minds.

This week sees the Institute for Supply Management’s manufacturing index for May being published on Thursday, whilst Friday brings the key Non-Farm Payrolls report for May. The latter is expected to rise by over 200k, but both will be further scrutinised for any signs of weakness in the US economy, which might prompt the Federal Reserve to hold off raising interest rates at next month’s policy meeting.

FOMC minutes are released tomorrow and will be further eyed to predict how US rate setting policy will move.

Reasonably quiet on the European data front today, with markets eyeing the US Consumer confidence figures due out at 3pm. Expectation is for a fall to 103 from 109.6. Although less severe of a decline than in the other confidence data released this month, labour conditions are still solid, thereby limiting the decline.

Sterling in a week of declines against the Euro

The Pound is poised for its first week of declines against the Euro in four, on speculation the yield premium of UK assets will be eroded.

The pound touched a two week low against the Euro this week as a report showed business confidence in Germany, which unexpectedly held near a 15 year high. For today, we may see the pound rise after BOE policymaker Paul Tucker said the Central Banks rate setters should be “constantly vigilant” about UK inflation expectations after recent signs that they may be increased.

The Euro continues to trade within its wider range of 1.2700-1.2900, following recent trading the expectancy is for a move towards the upper end of this range. There is support seen at 1.2780/90 with minor resistance at 1.2830/35. We expect a similar range-bound day to yesterday.

The Pound actively traded a 30 pip range around 1.87 before testing the 1.8775 key resistance level. The level held and fell back towards the lows. Strong initial support is being shown at 1.8690, with minor resistance being seen at 1.8650, dipping below this level could spark off a run down to 1.8420.

In overnight trading the Dollar was seen firmer as investors were positioning themselves ahead of tonight’s release of US Personal Income data for April. The data is widely seen as an important indicator of inflation and therefore a good yardstick for assessing future Fed policy. The market is expecting the Personal Income number to come in as a positive 0.7% rise in April, after a 0.5% increase in March.

The long weekend we are looking forward to in the UK and the US may act to dampen trading activity.

Dollar strengthens on positive US new homes sales Data

The Dollar rose sharply yesterday against the major currencies after the US new homes data came in well above expectations, further adding fuel to the notion that further rate hikes by the Fed are on the way.

US new home sales rose by 4.9% in April to 1.20m units, the highest level so far this year, and well above the analysts expectations of a fall to 1.15m units.

Eyes will now be on the Fed meeting of the 29 June in which the Fed could once again hike. The market currently is split 50/50 on the chances of the hike materialising.

In trading yesterday the numbers caused the Euro to reverse earlier gains on the stronger than expected IFO survey on the German Business Climate.

For today, attention turns to the second estimate of first quarter US GDP data, with a belief that we may see year on year growth up to 6%, revised from the previous estimate of 4.8%.

The Pound remains weak after the Industrial Trends survey from the Confederation of British Industry came in below expectations, showing a deterioration in the order books balance to -12 in May from -11 in April.

Earlier in the trading day however, the market was buoyed by extremely strong UK business Investment figures for the first quarter, although once again the improvements were seen to be from the manufacturing and construction sector, rather than the services sector, which saw a decline in investment.

For today, the first quarter UK GDP data will be released, giving additional data on household consumption. GDP is forecast to be left unchanged at a 0.6% increase from the fourth quarter for a 2.2% annual rise.

All pretty calm and then…….

The Dollar was pretty undecided for most of Tuesday, neither extending Monday’s losses, nor extending its one-day up and one-day down pattern at work against the European Currencies since May 12. Late in the day though, the dollar strengthened as Far East buyers continued to look for a safe haven seeking extra security after the World Health Organisation made worrying comments about the recent bird-flu cases in Indonesia.

The EUR/Dollar marked time on Tuesday in an inside range but then slumped in late trading. The pair is basically in a consolidation pattern, so while the bias is on the downside, look for the direction of the breakout.

In a similar vein to the Euro, the Cable (GBP/dollar) was treading water for most of Tuesday before hitting a downward move in late trading.

In market releases, German business confidence data will be released today. Economists expect the index to drop slightly from 105.9 to 105.0 in May.

In the US, the Durable Goods orders are expected to drop by 0.5% while ex transport orders are expected to increase slightly by 0.5%. Furthermore New Home sales for April is expected to show a cooling of the housing market, droping from $1.213m to $1.150m.

In Canada, the central Bank is expected to raise interest rates today by 25bp to 4.25%. As seems to be the norm in these cases, attention will be focused on the accompanying statement for signs of further hikes.

More volatility for the currency converters

Yesterdays trading saw the Pound fall against the Euro as some investors judge a near 2% gain in the past month as excessive given the prospect of interest rate increases later this year.

The Pound touched a one-year high versus the dollar last week as minutes of the Central Banks last rate setting meeting showed one policy maker voted to lift borrowing costs for the first time in a year.

The dollar may advance on speculation that sliding equity and raw materials prices will spur flows into less risky assets such as US Treasuries.

Concern higher interest rates will slow global growth and curb demand for commodities hurt emerging markets. Traders are selling shares and shifting to US debt, helping the dollar rebound 2.3% against the yen from the low for the year reached last week.

The Euro may benefit from speculation that the gap between European and US interest rates will contract this year. Klaus Liebscher, a member of the European Central bank Council fanned speculation that they are poised to add to two rate increases since December to head off the threat of inflation. The Euro has risen 8.6% this year against the Dollar, which has weakened as traders reduced expectations for how much more the Fed will raise its key lending rate.

Dollar rises on speculation US report to signal higher rates.

The dollar has climbed to a two week high against the yen and rose against the Euro on speculation that a US Government report will highlight faster economic growth, and subsequently prompt the Fed to retain its policy of raising interest rates. The currency advanced 1.2 percent last week, the first gain in six weeks.

Recent commentary from the Fed’s Hoenig however warns that overshooting on rates is a risk. “The Federal Reserve must guard against raising interest rates too high” Hoenig told the Wall Street Journal.

In Asia, currencies including the IDR and SKW declined on concern overseas investors are selling regional shares. Investors are showing signs that they have an expectancy that the Fed will continue to raise interest rates, thus denting demand for Asian exports and drawing money to higher yielding assets abroad.

In Europe, the recent rise of the USD has led leading Commodity stocks lower as metals and oil prices retreat. BHP Billiton, the worlds biggest mining company dropped 4 per cent in Australia trading. Rio Tinto, the second largest Iron Ore exporter fell 4.3%.

In this morning’s Australia trading, Oil prices steadied after shedding almost 5 per cent last week as investors, spooked by inflation concerns, locked in profits on a broad range of commodities that had been trading around record highs.

U.K. House Prices Increase for Sixth month

U.K. house prices rose in April for a sixth month, fuelled by demand for larger homes, the Royal Institute of Chartered Surveyors said early this morning. The survey of the three months through April found those reporting higher home values outnumbered those reporting declines by 15 percentage points, up from a revised 12 points in March.

Prices have gained almost every month since August, when the Bank of England cut its benchmark interest rate to 4.5 percent. The central bank predicts rising home values will spur consumer spending, driving faster growth in Europe’s second largest economy.

Around Europe The ZEW survey for May will be released in Germany with expectations of a continuation of the trend from the past few months. It is forecast that the component may decline in May to 60.0 from 62.7 in April.

In the US this afternoon, Housing starts for April are released which are expected to fall to 1,920K from March’s figure of 1,960K, this would be a drop for the third consecutive month.

Finally out today is April’s PPI which have been forecast to rise 0.8%, the highest increase this year, following gasoline and crude oil costs. Prices paid to factories, farmers and other producers last month is expected to have increased 0.8 percent, the most since December.

American companies, facing stiff competition from overseas, haven’t raised prices fast enough to keep up with soaring fuel costs. While higher commodity prices raise the risk that inflation will accelerate, smaller increases in the costs of other goods may give Federal Reserve policy makers a reason to hold rates steady in coming months.

UK Inflation expected to rise as oil and metal prices increase

U.K inflation is expected to have accelerated in April with oil prices trading above $70 a barrel and metals at record levels. UK consumer prices are expected to have risen from 1.8 per cent in March to 2 per cent, when the April data is released tomorrow.

The Bank of England last week said a jump in oil and natural-gas prices will push inflation above its 2 percent target in the coming months with some economists starting to believe that the central bank will raise its benchmark interest rate this year to curb price increases as economic growth accelerates.

Headline wage growth for March, due on Wednesday, is expected to remain unchanged at 4.2 per cent – below the level at which it would start to generate inflationary pressures. Although survey evidence is pointing to an increase in inflation expectations among consumers, this has not resulted in increased wage bids or higher earnings growth.

UK retail sales for April, due on Thursday are expected to increase 0.5 per cent following the increase in household energy and petrol bills starting to show an effect on consumer spending. Leaving a year on year increase rate of 2.6 per cent.

In the eurozone this week, there are no new revisions expected for headline April eurozone inflation at 2.4 per cent, so attention will on Wednesday turn to core measure, which is expected to remain unchanged at 1.4 per cent.

It is being forecast that core eurozone inflation will rise to 1.7 per cent, providing more justification for the European Central Bank to push interest rates higher. Industrial production for March in the eurozone, also due on Wednesday, is expected to slow to 3 per cent from 3.2 per cent in February.

In the US, year on year growth in industrial production is expected to have risen to 4.2 per cent in April from 3.6 per cent in March when figures are released tomorrow. Headline US producer price inflation is forecast to rise from 3.5 per cent in March to 3.7 per cent in the April data, which is also due tomorrow. Analysts will look for evidence that higher energy prices are creating inflationary pressures in the pipeline.

Higher petrol prices are expected to push headline US inflation from 3.4 per cent in March to 3.5 per cent in April in the data due on Wednesday. Core inflation forecasts remain unchanged at 2.1 per cent but any stronger increases will renew concerns that the Federal Reserve will have to return to increasing rates when it is widely thought that this is a suitable time for a pause.

The Dollar’s rapid decline since mid-April will ensure more attention than normal for the US foreign capital flows data for March, due today. It is expected that net capital flows will ease back from $86.9bn in February to $80bn, still comfortably higher than the monthly trade deficit.

Out in the UK today is ODPM house prices for March which is forecast to rise to a year on year rate of 4.0%.

US Dollar continues to fall

The US Dollar sunk further yesterday hitting fresh one-year lows against the GBP and EUR while against the JPY it moved beyond 8 month lows, on the back of fears the Federal Reserve is near the end of its long running interest rate increases and the ever present widening US deficits.

In the markets – the USD fought back overnight on Wednesday and early Thursday after the US Treasury stopped short of labelling China a currency manipulator but those gains were short lived.

Initially the GBP gained against the USD on a string of upbeat UK economic data. Manufacturing production data for March exceeded expectations while industrial production data followed suit, rising 0.7% versus expectations of a 0.2% increase. This saw the GBP/USD moved back up above 1.8700. The biggest move was still to come.

US Weekly jobless claims, business inventories and retail sales data were all released at 3.30pm with only inventories falling to disappoint. This weaker than expected data combined with the Fed, even though they continue to hold a bias to future interest rates, expecting economic growth to slow towards the end of the year, saw the US tumble and the fall has continued this morning.

The EUR has just breached 1.2900 and the GBP 1.8900 versus the USD. When will the rot end? Even the little AUD is 2 cents away from 80 (even better however it is now 1.2300 versus the Kiwi – and they were calling for parity – no chance).

The USD may gain some benefit against the JPY today on fears Japan may intervene following the JPY’s 7% increase over the past month – but at the moment there looks like there will be no respite. Today sees the release of US trade balance data and University of Michigan confidence data.

On the commodity front in short – everything is stronger. Gold is at yet another 25 year high, peaking at USD 726 an ounce while Crude oil is holding firm above USD 73 a barrel.
Meanwhile crude oil remained above USD 70 a barrel with concerns over Iran negated by a rise in US crude stocks. Platinum hit a record high of USD 1,300.