Articles from July 2006

Friday’s poor GDP figures diminish expectations of another Fed rate hike

The U.S dollar remained on the back foot going into the weekend after key data on Friday showed U.S. economic growth was much less than the market had expected in the second quarter. Official figures showed annual GDP growth was just 2.5 percent in the three months to June, less than half the 5.6 percent of the first quarter and well below forecasts for a more modest slowing to 3.2 percent.

The weak numbers further diminished expectations of another interest rate hike from the U.S. Federal Reserve on Aug 8th, causing the dollar to fall close to two-week lows against the euro and 16-day lows against the yen. Probability the market attaches to an August Fed rate hike has now dropped below 50 percent.

Some believe there is still a chance that the Fed could opt for one more precautionary rate hike, given the concerns over inflation. Friday’s core PCE data, the Fed’s preferred inflation measure rose to 2.9 percent in the second quarter, well above the Fed’s comfort level of 1-2 percent.

The Australian dollar reached 10-week highs against its U.S. counterpart, continuing gains made since very strong inflation figures on Wednesday all but confirmed that the Reserve Bank of Australia will raise interest rates next week.

The pound meanwhile was also close to seven week highs against the dollar as market players looked ahead to next week’s Bank of England interest rate decision. Though the Monetary Policy Committee is broadly expected to leave rates unchanged, there is still a small chance that they will opt for a hike given recent strong UK data.

Key figures this week will be the ECB and BOE meeting on Thursday, investors will be looking for guidance on the future of interest rates.

Choppy forex trading as market continues to look for Fed direction

The dollar has eased off yesterdays lows, which had seen the currency slump to two-week lows against the euro and the yen, as the market awaited today’s U.S. GDP numbers. The currency fell sharply earlier in the day in response to Wednesday’s release of the Federal Reserve’s Beige Book, which caused the market to rein back its expectations of another interest rate hike on August 8.

U.S. GDP today is the last big number, the last thing the Fed will be looking at ahead of the meeting on August 8. The market expects the data to show second quarter growth slowed to an annualised rate of around 3.1 percent from the heady 5.6 percent recorded in the first quarter.

Investors are likely to focus on the core PCE measure of inflation; though this is unlikely to worry the Fed too much, particularly after Fed chairman Ben Bernanke said last week that he expects slower growth to cause inflation to moderate. The chance of a further US rate hike in August lessened even further yesterday when the Fed said in its Beige Book that US growth was moderating while wage pressures remained benign.

In addition to the diminishing chance of a US rate hike this month, there is a growing rumor in the market that China could soon make a move to widen the Yuan’s trading band against the dollar, allowing the currency to appreciate further.

Elsewhere, the pound also eased after earlier surging to a 7-week high of 1.8678 against the dollar on a quiet day for UK data.

The Bank of England’s Monetary Policy Committee meets for its monthly rate-setting meeting next week. Although a majority expects that the MPC will leave rates on hold this time round, recent strong data have suggested that rates will move higher sometime during the coming months.

The Australian dollar continued to climb meanwhile following yesterday’s very strong inflation data, reaching a 10-week high against its US counterpart.

Commodities had a positive day, Gold opening in London this morning 1.67 percent higher at $645.5 an ounce and Oil almost 1 percent higher at $75.89 a barrel. Elsewhere the DJIA remained unchanged, the FTSE 100 climbed a marginal 0.89 percent and Asia’s Nikkei climbed 0.88 percent

Beige Book confirms Bernake’s view of slowing economy

The euro continued to edge higher amid firm expectations of a European Central Bank rate hike on Aug 3, despite a moderation in a closely watched survey of confidence in Germany. The keenly watched IFO business climate index slipped to 105.6 in July from 106.8 in June as sentiment in the manufacturing and retailing sectors worsened.

But the dip came after the jump to a 15-year high in June. Analysts said there was relief that the index did not suffer a sharper fall, leading the euro higher. The headline index is still way above the long-term average of 95 and as such continues to signal above trend growth in Germany.

At its previous rate setting meeting in July, the ECB said it would exercise strong vigilance, a code phrase for imminent action. Euro zone indicators typically lag those in the US by around 6 months, to increasingly challenge the consensus view of robust and self-sustaining euro zone growth.

Last night, attention turned to the Fed’s Beige book which gives a snapshot of economic conditions in the US. The report, along with several important upcoming economic indicators, such as second quarter real GDP growth and the July employment figures, will help condition market expectations for the August 8 Fed meeting.

Lasts nights data came in softer than expected; perhaps the Fed will seek more information before coming to a decision on further monetary tightening. A U.S. report today on new home sales may add signs the economy has cooled enough to warrant the Fed ending their two year cycle of rate increases.

The pound, meanwhile, got a modest lift after a key survey of the manufacturing sector found export optimism running at a two-year high in the UK. The quarterly industrial trends survey from the Confederation of British Industry suggested that the recovery in the sector, which accounts for around 15 percent of the UK economy, remains intact.

Elsewhere, the yen was supported by seemingly bearish comments from the Bank of Japan, “If the economy and prices move in line with the BOJ’s outlook, I think we will gradually adjust the level of interest rates in response to changes in economic conditions” was reported as being said. Earlier this month the central bank voted unanimously to raise the benchmark rate to 0.25 percent from near zero, its first rate hike in six years.

Separately, the Australian dollar got a boost from a pick up in inflation. The consumer price index in the second quarter jumped by 4.0 percent from a year ago, beating predictions of a 3.4 percent increase and surpassing the Reserve Bank of Australia’s 2-3 percent target range. The jump strengthened rate hike expectations.

Finally, Gold and Oil have both increased, opening in London at $634.7 and $75.14 respectively. The DJIA closed marginally lower, down 0.01 percent, Asia’s Nikkei finished 2.04 percent up and the UK’s FTSE 100 closed up 0.44 percent at 5877.4.

Currencu traders look for Fed direction

The U.S dollar remained steady against the euro in fairly dull trading, following its earlier gains during Asian trading hours yesterday. The US currency drifted lower from Wednesday onwards last week in the wake of relatively bearish comments from Fed chairman Ben Bernanke. He expressed concerns about moderating US economic growth, while indicating that inflation remains relatively well-contained.

His testimony to US lawmakers reduced expectations of another quarter point rate hike from the Fed in August from 80 percent to 65 percent as well as the probability of any further rate hikes. The Fed has raised its key Fed funds rate a quarter point on 17 consecutive occasions to 5.25 pct.

Today’s expectation is that we may see a further decline on the U.S. Dollar on concern Consumer Confidence data will suggest U.S. growth is slowing, perhaps adding to the sentiment that the Fed will stop raising interest rates.

Earlier this month, ECB president Jean-Claude Trichet hinted that the central bank will hike rates by 25 basis points at its early August meeting to 3.00 percent. He said the central bank will continue to exercise ‘strong vigilance’ with regard to potential inflationary risks in the euro zone as economic recovery gathers pace and oil prices remain high.

Elsewhere, the markets are on alert to any developments in Lebanon following the arrival of US Secretary of State Condoleezza Rice in Beirut at the start of her mission to end the conflict between Israel and the Hezbollah.

The visit has come as the US administration appears increasingly estranged from European and Arab allies over Israel’s massive onslaught which has sparked fears of a humanitarian catastrophe. The Rice mission has prompted speculation of a possible ceasefire and that has pushed oil prices lower. Concerns that the violence could have spread to major crude-producing nations in the Middle East saw oil prices soar to all-time highs above $78 earlier this month. Gold prices have also declined, currently trading at $613.2 an ounce at the London open.

Meanwhile, sterling remained well-supported on mounting talk of an imminent rate hike from the Bank of England. Expectations of a quarter-point rate hike next month have mounted in recent days as official figures showed inflation in June rising further above the central bank’s target and economic growth in the second quarter accelerating.

The GBP strengthened against the Euro yesterday before the release of higher than expected Euro-zone industrial new orders data. GBP fetched a 2-month high against the Euro before reversing its gains. The British currency showed steady losses against the Euro into mid-day trading.

Elsewhere, the Canadian Dollar fell to its lowest level in more than three months as an unanticipated decline in retail sales bolstered expectations that the central bank will refrain from raising interest rates again this year.

Currency converters lift USD as it regains Friday’s lost ground

The dollar has moved back to the front foot this morning following its slide last week after fed chairman Ben Bernanke stated inflation would likely ease in coming quarters as growth slows.

Reasons for the dollars pullback have been attributed to profit taking, the US being a safe haven and also to speculation that global growth concerns are attracting funds from emerging markets to less risky US denominated assets. Many also feel that the dollar is consolidating and all eyes are now on US data to be released later in the week, such as home sales, Q2 economic growth and consumer confidence, to determine whether the fed will lift rates next month to 5.5%.

The euro and sterling both retraced against the dollar in a similar fashion with sterling retracing from a six week high of 1.86 to 1.8515. Both currencies, although down this morning against the dollar, still remain strongly supported on the back of strong data last week and sit in a good position to capitalize should the US data this week come in lower than expected.

In other news, the Canadian dollar has slumped through 1.14 against its US counterpart breaking through a key range of 1.12 to 1.14, coming on the back of lower inflation data in Canada this move has also helped push sterling above the 2.10 level hitting a high of 2.1167.

Elsewhere, Oil was down to $73.32 a barrel and Gold fell further to $616 an ounce on signs that cease-fire talks may be near in the conflict between Israel and Hezbollah forces. Copper prices fell by 1% in New York amid concerns that demand will fall in China and the US, the biggest consumers of the commodity. Looking at the main indices, Asia’s Nikkei closing 0.189 percent lower, the U.S Dow was down 0.5 percent and the UL FTSE 100 was up 0.41 percent.

US Dollar continues to loose ground as the Pound strengthens against the Euro

The dollar was on the back foot again after news of moderation in some key US indicators dominated yesterdays trading. The Philadelphia Federal Reserve Bank’s index of business activity plunged to 6.0 in July from 13.1 the previous month. The latest figure also fell short of expectations of a more modest dip to 8.0. On the same day the Conference Board’s index of Leading Economic Indicators rose just 0.1 per cent in June after falling for two consecutive months.

Taken together, the numbers were seen as further evidence of a cooling economy, which in turn weighed on US rate hike expectations. The US dollar enjoyed a brief recovery early morning but the effect faded amid renewed speculation that US rate setters will not hike interest rates in August. US Federal Reserve chairman Ben Bernanke’s testimony to the Senate on Wednesday was widely seen as bearish. He highlighted that cooling US growth levels may well help ease inflation.

Markets are starting to bet that the Fed will pause from its rate hiking cycle which started way back in mid-2004, at its next meeting on August 8. But upcoming data, such as the US jobs report on August 4, will also play a vital role in determining expectations. The benchmark fed funds rate now stands at 5.25 per cent, having risen from as low as 1.00 per cent back in 2004.

The Pound continued to be bought, bolstered by renewed expectations of a Bank of England rate hike before the year ends after a string of robust UK data. The flood of UK data yesterday, ranging from retail sales to mortgage lending and money supply all registered strong growth. And the data came on the heels of a jump in inflation earlier this week.

A strong bounce-back in food and drink purchases helped retail sales in the UK increase for the fifth consecutive month during June, the first such sequence since January 2004, official figures showed on Thursday. Figures from the Office for National Statistics revealed that retail sales, which account for around a third of total household spending, rose by 0.9 per cent on a seasonally-adjusted basis in June from May. The rise tops expectations of a 0.2 per cent increase.

That the Pound has not responded more vigorously to the numbers may reflect the fact that the currency had already enjoyed considerable gains in the last few days after the stronger-than-expected inflation release.

Opinion is still divided on whether the Bank of England will deliver a rate hike in August or failing that in November to coincide with the central bank’s next two rounds of projections. The tone of next month’s Quarterly Inflation Report will be critical in illustrating whether a 2006 rate hike is now a realistic prospect.

Elsewhere, Oil has remained steady at $75.05 a barrel as Iran repeats nuclear ambitions and Gold has shown a modest decline to $632.5 an ounce. The main indices lost most of there Wednesday gains, Asia’s Nikkei closing 0.82 percent lower, the U.S Dow was down 0.76 percent and the UL FTSE 100 down 0.12 percent.

Dollar stutters as Fed signals slowing growth and abation of inflation

The U.S. Dollar lost almost all of its gains since Monday as markets interpreted Fed Chairman Ben Bernanke’s statement to congress as bearish. He said that the climate of slowing growth and rising inflation puts the Fed in a tricky spot in terms of setting interest rates. While promising vigilance about inflation, he also said that a slowing economy should moderate inflation down the road. Markets took the comment as an indication that the Fed may pause from hiking rates when it next meets on August 8th.

The euro and pound both clawed back over one cent on the Dollar, having lost ground as the Dollar found favour as a safe haven currency amid the tensions in the Middle East. The Dollar did however find a modest boost when it was revealed that core U.S. inflation figures rose above expectations in June. Official data revealed that core CPI inflation, which excludes energy and food, rose by 0.3 percent in June from May, above expectations for a more moderate 0.2 percent rise.

Elsewhere, the pound weathered news that UK rate setters voted unanimously to leave interest rates unchanged in July as market focus stayed on Tuesdays much stronger than expected inflation data. In the minutes to its July meeting, the Bank of England MPC said the outlook for inflation had not changed much since its previous meeting in June as it left the rate at 4.5 percent for the 11th month running

However, the MPC would not have had access at that time to the June inflation figures which were publicised on Tuesday to reveal a massive 2.5 percent jump in annual inflation, immediately increasing talk that interest rates could be heading higher in the coming months. The MPC will be ever more alert for signs that second round effects are developing, and the odds that interest rates will rise before the end of the year have shortened noticeably. The GBP initially fell on the news that no member had opted for a hike but soon reversed those losses to move back up again.

Oil has continued its decline from the all time high set late last week, dropping a further 0.49 percent at the close to trade at $75.57 a barrel, Gold rose 2.07 percent to $642.3 an ounce and Copper has continued to rise, moving a further 0.53 percent since yesterdays open. For the first time in two weeks, all 3 main indices closed on a positive, the Nikkei up an impressive 3.08 percent, the Dow 1.96 percent and the FTSE 100 1.69 percent

Forex market looks for guidance on the future of the Dollar as Bernanke speaks to Congress

The U.S. Dollar slipped back off yesterday’s intra day gains against the Euro and Yen on news that wholesale prices rose by less than many anticipated during June. The Labor Department reported that the headline rate, which includes food and energy, rose by 0.5 percent between May and June, and more than the 0.3 percent anticipated, however the core rate which excludes food and energy costs rose by the expected 0.2 percent.

Because the core rate did not surprise the upside, as many investors were predicting, there is potential for relatively soft CPI data this afternoon that could soothe concerns at the U.S. Federal Reserve.

The focus on the U.S. has kept euro/dollar within tight ranges despite an extremely disappointing survey of Germany’s economy yesterday. The ZEW research institute said its German economic expectations index dropped to 15.1 points in July from 37.8 in June, partly due to rising Oil prices. The fall was way below the expectations of a more modest decline to 34.0.

Following the data release, the euro fell marginally against the Dollar, although soon recovered, and lost significant ground against GBP. It is doubtful yesterday’s poor data will stand in the way of another interest rate hike from the ECB in August. Earlier this month, ECB president Jean-Claude Trichet said the Central Bank will raise rates by 25 basis points at its August 3rd meeting. He said the bank will continue to exercise ‘strong vigilance’ with regard to potential inflationary risks in the euro zone as economic recovery gathers pace and oil prices remain high.

All focus has been on a flow of positive economic data from the Euro economy, yesterday’s minor setback is not considered to be momentous enough to halt the next rate hike to 3.0 percent.

Elsewhere, GBP was boosted by news that inflation in the UK increased far more than anticipated during June, as well as a stronger than expected survey of the housing market.

Oil seems to have lost momentum, stepping away from the $80 region to close at $75.94 a barrel. Gold has also lost significant ground from last weeks highs, closing at $629.5 an ounce. The small corrected in commodities may have benefited the main equity indices, the Dow Jones closing up 0.48 percent, London’s FTSE 100 dropped 0.34 percent and Asia’s Nikkei closed up 0.44 percent this morning.

Conflict in the Middle East continues to move the markets

The U.S. Dollars rally continued, fuelled by the hostilities in the Middle East and record Oil prices. Markets remain focused on developments in the Middle East amid weekend reports of escalating military activity in Israel and Lebanon and a lack of guidance from the G8 leaders meeting in St. Petersburg.

The Dollar jumped 1 percent against the Euro and hit a 3 month high versus the Yen yesterday, as investors continued to use the Dollar as a safe haven during this time of significant political unrest.

Although global tensions should continue to support the Dollar, the markets attention should return to the economy this week. Yesterday, Industrial Production in the U.S. rose by a stronger than expected 0.8 percent in June, perhaps suggesting that the U.S. economy may not be slowing as quickly as some expect.

The main focus though will be on Wednesday, when CPI figures will be revealed, investors will be looking for any sings of an increase in inflation to gauge whether the Fed is likely to extend its 2 year monetary tightening campaign with another rate rise to 5.5 percent at its next meeting in August.

Across in the Euro-Zone, yesterday’s inflation and industrial output failed to bring the Euro any strength, despite all the odds stacked in favour of higher interest rates in the12 nation area. The harmonised index of consumer prices rose a final 2.5 percent year-on-year in June, unchanged from a provisional estimate and from the annual rate in May. Industrial output also outpaced expectations, rising 1.6 percent in May from April, and up 4.9 percent year-on-year.

House prices are also expected to have remained strong in June after their strongest increase in over 2 years in May. Today’s flow of expected bullish economic data in the UK should certainly add favour to the GBP against the U.S Dollar and Euro.

On the commodity front, Oil dropped to $77.45 and Gold to $651.49, however the short term view is bullish given that the conflict in the Middle East looks set to continue. Asia’s Nikkei index closed down 2.66 percent, UK’s FTSE 100 closed down just below 5701 however the U.S. Dow Jones benefited slightly from the drop in Gold to close up 0.09 percent.

Conflict in the Middle East remains the focus across all markets

Fridays poor U.S. retail sales figure did little to dampen the Dollar rally. Although the initial reaction was to sell, the troubles in the Middles East and the surging price in Oil has allowed the Dollar to maintain its safe haven status.

Following the Bank of Japans decision to increase the interest rate by the expected 25 basis points, the accompanying statement indicated caution and did little to help the Yen pull back its early week losses against the Dollar.

The Middle East conflict is certainly the main focus at present, with the U.S Dollar touching 2 week highs against the Euro and Yen after rockets fired yesterday by Lebanon’s Hezbollah hit the central train station in Israel’s third biggest city.

The Dollar, along with Gold and Crude Oil are considered safe during such times, and as the conflict shows no immediate signs of coming to an end, we may see further Dollar buying on the market.

Elsewhee, the Euro lost ground against both the U.S. Dollar and GBP. A German report due tomorrow is expected to show investor confidence has dropped to its lowest in more than a year, spurring concern that further interest rate increases and the record Oil prices will crimp economic escalation.

The economy is certainly heading for its best performance since 2000, domestic orders for manufactured goods rose in May and confidence among executives unexpectedly jumped to a 15 year high last month. The ECB will raise rates again on Aug 8th, the 4th increase since December. Investors expect the ECB to continue the hike to 3.5 percent by the end of the year.

The New Zealand Dollar stays around one month highs as inflation data shows prices rose at the fastest quarterly rate in 16 years. CPI in the second quarter rose a higher than expected 1.5 percent from the previous quarter and was 4 percent higher than a year earlier. The recent gains may be short lived as the massive current account deficit remains a real long term problem.