Articles from June 2006



Dollar weakens against all major currencies

Unsurprisingly the Fed increased the interest rate to 5.25 percent for the 17th consecutive time, claiming that slowing economic growth should help rein in inflation. Ben Bernanke gave a clear indication that the rate hike cycle may have come to an end, causing the dollar’s decline against all major currencies.

The Dollar had enjoyed 2 month highs this week on the expectation that the Fed would raise rates to 5.5 percent at the next meeting in August 8th however last night’s statement indicated this won’t be the case. Continued pressure from the European Central Bank and the bank of Japan who may start raising rates this year, still leave the door open for an increase next month

Thursdays Private Sector borrowing costs from the Euro Zone have added further pressure for the ECB to increase the interest rate. Although ECB president Jean-Claude Trichet has yet to comment on the Fed meeting, business confidence in Germany hit a 15 year high this week and unemployment figures yesterday showed a sharper than expected fall , the general consensus is that there will be a significantly higher probability of an acceleration in the pace of ECB monetary policy tightening.

The ECB has raised it’s key rate 3 times since December to 2.75 percent, the general consensus is that we will see an increase to 3.25 percent by year end.

After a quiet week on the market, today should show a lot more movement as the world digests the Feds indication that the rate hike cycle may have finally come to a halt.

Elsewhere, the Kiwi Dollar has re gained some of it’s lost ground against the GBP, currently trading at 2.99 at the London open. All major currencies have shown significant strength against the US Dollar.

Commodities sprang to life after yesterdays Fed decision, Gold trading at $588.9, Oil spiking above $73 a barrel and copper opening 4.03 percent from yesterdays close.

All 3 Indicies also closed on a positive note for a second day.

Waiting for the FED

The main currencies remain unchanged this morning as everyone awaits the Fed’s decision on interest rates this afternoon.

The Fed’s 2 day monetary policy meeting kicked off yesterday and is unanimously expected to tighten rates by a further 25 points to 5.25 percent. Although the market has already factored in this increase, it will be the accompanying statement, that may give clues to what may happen in the August meeting and beyond, that all eyes will be on.

The continuing inflationary pressures and the rapidly expanding economy are a major issue and the Fed’s quick fix rate hike solution may be wearing thin on the ground.

A German report due this morning is expected to show a decline in unemployment for a third month, giving further strength to the Euro and reinforcing the view that the Euro economy can indeed cope with the Bullish outlook of the ECB on interest rates. Consumer confidence currently stands at its highest in almost 5 years.

Elsewhere the Canadian Dollar remains flat in anticipation of today’s Fed meeting, the New Zealand Dollar slumped to a 2 year low against the US Dollar after data showed a much larger than expected trade deficit. The Kiwi Dollar traded at a 2 year low against its US counterpart, causing a knock on effect to the Australian Dollar which fell to a 10 week low against the US Dollar.

On the commodity front, Oil is continuing to surge, trading at over $72 a barrel as gasoline demand strengthens in the run up to the Independence Day weekend. Gold also rose to over $580 an ounce, as some investors are buying to hedge against higher energy prices and inflationary pressures.

All 3 major indices closed on a positive note.

Sterling currency converts to 2 month euro low forex

Sterling hit a 2 month low against the Euro on Tuesday following figures from a stronger than expected German IFO index. The increase from 105.7 in May to 106.8 in June, despite the reality of higher interest rates and energy costs, will undoubtedly boost confidence that the Euro-Zone economy can cope with further monetary tightening.

The Euro has had a positive run, casting a shadow over the GBP, Dollar and Yen, however the issue of inflation still looms.

The US Dollar remains reasonably flat in anticipation to see what the fed will signal in its statement after their meeting tomorrow, although not expected, if they give an indication that they are coming to an end of the rate increase cycle we may see the Dollar being sold off.

The Canadian Dollar eased slightly against the US Dollar as the market shrugged off higher commodity prices ahead of tomorrow’s rate decision. Even the rise in Oil prices to above $72 a barrel on expectations for lower US gasoline supplies and a slight boost in Gold prices did little to lift the Canadian Dollar.

Elsewhere, the New Zealand Dollar has broken 3.05 against Sterling this morning, currently trading at the high of the day, the Kiwi has broken the key 0.60 level against its US counterpart.

All 3 major equity indices closed down over the continued concerns over the direction of the US economy

Sterling forex currency rates weakness

Sterling hit a two and a half week low this week against the euro following the Bank of England MPC’s bearish stance on interest rates last week. British house prices rose at their sharpest annual rate in one and a half years, putting the MPC in a predicament as to whether a rate hold is a good idea – perhaps we may see an increase before year end despite a 7-1 vote against it.

The contradicting news and economic data have left the pound in limbo, being pulled both ways by the Dollar and Euro respectively.

By contrast, the Euro is approaching its all time high against the Yen, and continuing to pull away from the two month low against the dollar following bullish comments from ECB policy makers on Monday.

The general consensus is that the ECB will increase rates by 25 basis points to three percent at their meeting on August 21st, however an early meeting on August 3rd is by no means ruled out, and we may in actual fact see two further rises before year end.

The US Dollar has shown further weakness on speculation interest rate increases by the Fed may slow growth in the world’s biggest economy. News became known yesterday that the United Arab Emirates would shift its foreign exchange reserves away from the US Currency and into the Euro.

The central bank of UAE said it would shift 10 percent of its reserves, however no indication was given as to when this may take place. A 25 basis point increase on July 28th has already been factored in, however traders have given an 85 percent chance of a further 25 point increase in August,

Elsewhere, the dollar eased from a two month high against the Yen and the Swiss Franc.

Turing our attention to commodities, a rally in precious metals prices and a weaker US Dollar are set to offer respite for local financial markets today. The Rand is firmer this morning, it has received a lift from the recovery on emerging markets and a weaker US Dollar. Gold, Oil and Platinum have all shown gains over the past 24 hours.

Another hike from the Fed on the way

It is now seen as very much of a “done deal” that the Fed will hike US Interest Rates for a seventeenth consecutive month this week. Ahead of the actual announcement, and more specifically the accompanying commentary, the market will continue to be concerned as to where the rate will top out given the FOMC’s heightened concern with US inflation.

The focus will today fall on the Euro, with the currency looking to advance ahead of a German report that will likely show that inflation is rising, adding further to those speculators predicting that the Central Bank will lift borrowing costs.

The bank raised its benchmark rate to 2.75% on June 8th and signalled that further rate increases may be necessary to control inflation amid near record oil prices and faster than expected economic growth.

Here in the UK, the Pound may gain after an industry report showed house-price growth at its fastest pace in two years. Data such as this inevitably leads to pressure on the BOE Monetary committee with a greater likelihood in a rise in interest rates.

The Pound is up 5.7% against the dollar this year as the increasing Consumer Prices and Property inflation signal higher interest rates. I would therefore expect further support of the Pound over the next day or two.

For todays market announcements, Japan declare Corporate Service Prices for May at 00:50 BST, which is expected to fall year on year once again, forecast at -0.2%.

Additionally, in France the June Business confidence figures for June will come to the market (07:45 BST) with a single point decline being expected.

Sterling forex rates drop on sad news

The unexpected death of Bank of England’s Monetary Policy Committee member Walton triggered a sharp sell-off in the British pound yesterday. It fell 2 cents against the dollar to a one and a half month low.

Walton was the lone dissenter in the May and June meetings voting for a rate hike. His untimely passing will reduce chatter of a summer rate hike, which could add pressure already being seen on the pound.

Across the pond yesterday we saw a sharp fall in the Conference Board’s Composite Index of Leading Economic Indicators. It was the biggest drop since a 0.8% plunge in September ’05 after Hurricane Katrina smashed the US Gulf Coast.

Goldstein, the Conference Board’s economist cited several factors inhibiting the US economy, ‘higher gasoline prices, a slowing housing market, higher interest rates, a loss of both business and consumer sentiment, have all combined to slow the forward pace of economic activity pushing growth to a sub-par level this summer.’ Also on Thursday jobless claims rose by 11k last week to a level pretty much in line with expectations.

Elsewhere yesterday, the South African rand and Turkish lira hit two and a half year lows and three year lows v the dollar. Other emerging market currencies from South America and Eastern Europe also tumbled against the Greenback. Emerging market bourses and bond markets continue to suffer selling, especially in those economies with widening budget and trade deficits.

With only US May durable goods data being released today things are likely to remain fairly subdued. Market expectations are for a reversal of the previous month’s drop to a slight increase.

BOE minutes as expected, ECB signal further rate hikes to come

The Bank of England voted 7-1 to leave rates unchanged in June; only one member went against the grain and favoured a quarter point hike. Minutes of the meeting showed that for the second month in succession David Walton voted for an increase because of concern over inflationary pressures.

Interest futures rallied but the pound fell against the dollar as the MPC members showed they are content with leaving things on hold for the time being. The biggest news at the MPC was the recent turmoil in global financial markets. Members argued that a sustained fall in stock prices and rise in the pound could temper inflationary pressures.

European Central Bank President Trichet signalled likely further interest rate hikes in the eurozone yesterday; he told a parliamentary committee that the ECB would not hesitate to make sure that inflationary pressures are kept under control.

Trichet described growth prospects in the eurozone as positive, with recent data showing ‘encouraging signals’. A sustained period of solid growth would remove an obstacle to the ECB raising rates.

Elsewhere yesterday the Canadian dollar jumped 1.1% to 1.1052 v US dollar, closing in on the 28 year high of 1.0944 it reached at the end of May. The Bank of Canada had signalled that after 7 consecutive rate hikes taking rates to 4.25%, it was likely to pause. However, very strong retail sales along with a recent string of strong economic data may force the BOC to continue raising rates.

Yen advances on rate hike hopes

The dollar hit a one week low against the yen on Wednesday morning amid growing speculation that the Bank of Japan will raise interest rates next month.

BoJ Governor Toshihiko Fukui said on Tuesday that Japanese monetary policy needed to be adjusted “without delay”, sparking speculation that the central bank would hike rates for the first time in six years in July.

The yen hit a one-week high of Y114.40 against the dollar after the comments, before pulling back to stand at Y114.76, still 0.2 per cent stronger from the start of the session.

Dollar weakness against the yen spilled over, sending it 0.3 per cent lower against the euro to $1.2620, 0.2 per cent weaker to $1.8454 again sterling and off 0.1 per cent to SFr1.2363 against the Swiss franc.

Elsewhere sterling hit a one-week low against the euro, falling 0.3 per cent to £0.6848, after the minutes of the Bank of England’s June Monetary Policy Committee showed that the decision to leave interest rates unchanged was approved by all but one member.

David Walton was the one dissenting voice calling for a 25 basis point rate hike as the committee voted 7 to 1 in favour of keeping UK interest rates at 4.5 per cent.

Market awaits Bank of England minutes

The Bank of England left rates unchanged at its June policy setting meeting and the markets are bracing for a slightly more hawkish tone in the minutes. Some economists are even expecting 2 votes for a rate hike.

The overall consensus however is calling for an 8-1 split for leaving rates unchanged. Short term sterling strength is likely to be seen if the number voting for a rate hike is greater than one. Across the pond, there is little to interest today, meanwhile in the eurozone Trichet’s parliamentary testimony could cause some stirring.

The yen continued its mini revival yesterday after the Bank of Japan governor Fukui revived hopes for a July rate hike. The minutes of the meeting also boosted the yen, it was said that a strengthening yen did not appear to pose difficulties for Japanese businesses.

The housing market in the US showed mixed signs as housing starts rose 5% last month breaking a three month decline streak. However home starts were still down 3.8% from May 2005. Building permits fell to their lowest level since November 2003 which was consistent with yesterday’s release of the National Association of Home Builders’ sentiment index, which fell to its lowest in more than 11 years.

Greenback weakens as currency portfolio inflows disappoint

The US Dollar weakened for the second successive session, as the US Treasury reported that foreign inflows into the US markets fell to their lowest level in a year in April. The figure came in at $42.7bn, insufficient even to cover April’s trade deficit of $63.4bn. The Dollar sentiment was further damaged as Industrial Production fell 0.1% compared with market expectations of a 0.2% rise.

The Philly Fed fell to 13.1from 14.4, which was stronger than the expected level of 11.0. Although the greenback lost ground against the majors following the disappointing data, it found a degree of support from comments made by Fed Chairman, Ben Bernake. Although Fed officials have repeatedly stressed the need to remain wary of rising inflationary pressures, Bernake stated that inflation expectations were well managed.

Sterling strengthened against the Dollar and the Euro yesterday following strong UK retail sales for May, adding to speculation about a hike in UK interest rates. The Euro edged higher against the US Dollar as traders cited talk of an Asian central bank being a big buyer of Euros near $1.2500. EMU CPI was confirmed at 2.5% for May in line with expectations.

The Chinese Yuan traded at its highest level against the Dollar since its revaluation in July last year, market rhetoric suggests that the Chinese central bank is willing to allow more volatility.

In the session ahead, traders will focus on several key economic reports from the US. The current account deficit for Q1 and the June University of Michigan consumer sentiment report – which is expected to slip to 78.0 from 79.1.

In the equity markets, there was a marked improvement as the S& P 500 posted its best day since 2003, closing up 2.1%, or 26.21 points. In India the BSE Senex index recorded its biggest ever one-day points gain.

Gold jumped $14 to $572.00 a troy ounce lifting from its three-month low, silver, copper, aluminium and nickel prices also bounced back. Government bonds fell yesterday as short-dated yields on US Treasuries rose to new highs.