Articles from September 2006



Dollar keeps its cool as Sterling declines

The Pound fell nearly 1 per cent against the dollar and euro yesterday as the markets digested the news released by the UK’s Office for National Statistics (ONS) regarding their admittance to a calculation error yesterday. The ONS said it had cut its estimate for overall inflation for goods and services produced by British companies from 3.4 per cent to 2.2 percent, which could play on the MPC’s mind as it next sits down for its monthly interest rate setting meeting.

The dollar, on the other hand, kept its cool amongst its peers as it gained strength against the trend of negative data that kept on pouring out the US. US gross domestic product slowed from an annualised 5.6 per cent in the first quarter of the year to 2.6 percent in the second quarter.

This measure of inflation had eased from the government’s prior estimate of 2.9 per cent and was attributed to the decline in residential construction, business spending and consumer demand all leading to the slow down in the US economy.

Over in Asia the yen declined further against the dollar and euro on speculation that a fragile recovery in the economy will allow the Bank of Japan to keep interest rates on hold this year. Data released earlier this morning showed a small increase in inflation to 0.3 per cent last month, which was in line with expectations, while Industrial production rose after slipping in July.

The unemployment rate also remained near an eight-year low. Hiroshi Watanabe, one of Japan’s currency officials, this week suggested that the central bank should keep rates near zero percent to avoid snuffing out a recovery.

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Currency converters uncertain of the future

The dollar remained stuck in a tight range against the euro as mixed US data failed to give any further indication on the outlook for US interest rates.

A disappointing set of US durable goods figures were later followed by better-than-expected US new home sales data, which further eased concerns about a sharp downturn in the housing market. A string of weak US data last week sparked talk of an early interest rate cut by the Federal Reserve, but stronger economic figures this week have muddied the outlook.

Figures out of the US today include weekly jobs claims and economic output. Weekly jobless claims are seen falling slightly to 315,000 from 318,000 in the prior week and Economic output in the second quarter is seen rising slightly faster than earlier estimates. Q2 GDP is now seen rising at a 3 percent annual rate, compared with the 2.9 percent estimated last month.

Among other currencies, however, there was more movement. The pound was lower across the board after a very dovish speech yesterday from Monetary Policy Committee member David Blanchflower. The only member to vote against an interest rate rise in August, Blanchflower argued that the UK labour market remains weak and said he sees a risk of lower output and inflation in the months ahead.

Yesterdays comments by David Blanchflower cement his place as currently the most dovish member of the Monetary Policy Committee, and it is clear that he leans towards the view that the eventual next move in interest rates should be down rather than up. Though the market continues to believe that the Bank of England will raise interest rates again in November, Blanchflower’s speech weighed on the pound, offsetting strong data yesterday morning and hawkish comments from another MPC member John Gieves.

The pound has lost significant ground this morning following the Office of National Statistics admitting to making an error in forecasting UK inflation.

The yen meanwhile was also lower, with the euro rising back comfortably above the 149 yen level to a high of 149.30 after comments by finance minister Koji Omi, who said it is too early to contemplate possible any action on the high euro/yen level.

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Dollar strengthens on home data

The dollar moved higher after US data yesterday afternoon showed a bigger than expected rebound in consumer confidence in September.

The US Conference Board said its consumer confidence index rose to 104.5 in September from an upwardly revised reading of 100.2 in August. The market consensus was for a much more modest rise to 103.0 from the provisional reading of 99.6.

Stronger than expected reports on confidence yesterday and existing home sales on Monday has helped to curb bearish dollar sentiment. In the wake of the data, the euro fell to a one-week low of 1.2764 usd, while the dollar rose to a five day high against the yen of 117.21.

Released at the same time, a strong Richmond Fed survey of manufacturing, which rose to 9 in September from 3 in August, also caught the market’s eye. Though this survey is usually paid little attention, it will ease fears of a sharp slowdown in the US after last week’s dismal Philly Fed reading.

Whether the dollar continues its upward trend, however, will depend on upcoming US data during the rest of the week, with durable goods and new home sales due today, followed by revised second quarter GDP and personal income and spending. There is little doubt that the going will be treacherous this week for dollar bulls, the market appears willing to sell dollars on the slightest indication of weakness.

Meanwhile, the euro was lower, shrugging off a stronger-than-expected German Ifo survey yesterday morning, as weak German inflation numbers suggested that the European Central Bank may have little room to raise interest rates after the end of this year.

The pound rose, hitting new 10-month highs against the euro, on continued expectations that the Bank of England will raise interest rates further in November.

The final estimate to second quarter UK GDP is due today and is expected to confirm economic growth at 0.8 percent from the first quarter and 2.6 percent year-on-year.

The Confederation of British Industry’s latest distributive trades survey is also due out today and is expected to show high street sales slowing very slightly but remaining robust.

Oil and Gold opened 0.92 percent down and 0.20 percent up, trading at $61.4 and $597.1 respectively.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Home loans sales data not as bad as feared

The dollar was firmer yesterday after US existing home sales data was not as bad as the market had feared. Figures released yesterday afternoon by the National Association of Realtors showed that US existing home sales fell 0.5 percent to 6.3mn units in August from the previous month.

Although this is the lowest level since January 2004, analysts had expected a bigger drop to 6.102mn units from July’s original estimate of 6.33mn units, in line with recent evidence of a sharp slowdown in the US housing market. Even though US economic data is nothing to write home about, housing is not slowing as fast as feared.

Meanwhile, sharp falls in crude oil prices were also supporting the dollar, while weak German regional CPI inflation figures weighed on the euro as speculation increased that the European Central Bank may not need to raise interest rates as much as previously thought. Figures out from the five German states showed CPI inflation fell by 0.4 percent in September from August, giving annual rises of between 0.7 and 1.5 percent.

These early reports suggest that the German annual inflation rate could be pushed down as low as 1 percent in September from 1.7 percent in August, potentially causing September euro zone inflation to fall well below 2 percent. This expected slowdown in euro zone inflation should not stop the ECB hiking to 3.50 percent in this cycle (from 3.0 percent currently), but it should make the ECB think long and hard about raising rates any higher next year.

German import price inflation is expected to slow markedly in August as a result of falling oil prices. Import prices are expected to show a month-on-month decline of 0.1 percent, reducing the year-on-year rate of increase to 5.2 percent from 6.3 percent. In the absence of euro zone import price data, German import price inflation is regarded as the best indication of euro zone imported inflation pressures.

German CPI inflation is expected to fall sharply in September as a result of declining petrol prices and base effects related to last year’s increase in energy prices after Hurricane Katrina.

From the UK, business investment for the second quarter is expected to be unrevised on both a quarterly and annual basis at 1.7 and 4.2 percent respectively. Underlying fundamentals such as healthy corporate profitability, the recent cyclical upswing and an ongoing fall in the relative price of capital goods should all continue to support corporate capital investment spending.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Slowing US economy causes Dollar weakness

The US Dollar fell for a fourth day against the Pound and Euro on speculation US reports will add to evidence of a slowdown in the economy, prompting more investors to bet the Federal Reserve will cut interest rates.

The dollar had fallen to over two-week lows against major currencies earlier in the day in a continued response to Thursdays dismal Philly Fed survey out of the US, which cemented market expectations that the next interest rate move will be down. Despite the moves lower, however, the US currency remained firmly stuck within its recent trading ranges.

The dollar has fallen 7.6 percent this year against the euro as the Fed halted its 2 year run of rate hikes. Traders are pricing in about a 16 percent chance the Fed will cut its benchmark rate of 5.25 percent by December.

Meanwhile, the Swiss franc was sharply higher across the board, benefiting from a sharp rise in risk aversion in the wake of political uncertainty in Hungary and Poland and the military coup in Thailand. The Swiss franc rose to 17-day highs against the dollar and 10-day highs against the euro. At the same time, emerging market currencies came under pressure, with the Turkish lira falling to eight-week lows against the dollar and the Brazilian real to 12-week lows.

Meanwhile, the Pound eased off earlier highs against the dollar but remained steady against the euro. No major UK data was released on Friday, with markets looking ahead to this week, when data is forecast to show continued strength in the UK housing market, cementing expectations that the Bank of England will raise interest rates again in November.

Commodities- Oil has continued on the decline, trading at $60.55, along way from the $80 mark last month. Gold gained marginally to $595.4 up 1.19 percent from Fridays close.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Slowing US momentums drags dollar down

A surprise drop in regional factory activity reported on Thursday suggested that the U.S. economy may be losing momentum faster than expectations and brought about conversations of a possible cut in interest rates from the Fed to avoid recession.

The Philadelphia Federal Reserve Bank said its business activity index tumbled to -0.4 in September from 18.5 in August, below expectations of 14.8 and the first time the index had fallen below zero since April 2003 – a negative figure represents that manufacturing is in decline.

The Philly Fed survey is suggesting a cooling off in the economy but at the same time we’re witnessing some potential moderation in inflation pressures – good news for the Fed. The downturn was mirrored in the US Leading indicators released earlier in the session which were the lowest level in almost a year.

Elsewhere the yen firmed against the dollar and recovered somewhat versus the euro. Japan’s Q3 business sentiment index saw sentiment at large manufacturers’ rise sharply to 12.7, compared with 1.4 in the previous quarter. The outlook outlook for the Q4 is seen at 11.1. Meanwhile, Q2 large non-manufacturers’ business sentiment was up to 9.2.

Elsewhere things are relatively quiet at the start of a day where there is a lack of meaningful data due for release. ECB member Erkki Liikanen has added to the rhetoric heard from Gonzalez Paramo earlier in the week, stating that vigilance was needed on inflation despite a sharp fall in oil prices.

He went on to say that the global economy had seen a period of strong economic momentum which should stay firm with European growth now broad based however that three risks remain to economic growth, namely the U.S. housing market, high oil prices and global imbalances.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US remains on hold with accompanying statement flat

The dollar drifted lower ahead of the main event of the day, the US rate decision, the accompanying statement last night came in a little more dovish than previously expected and kept the rate on hold at 5.25 percent. This should leave the markets content to continue to price in no resumption of Fed tightening, particularly against the backdrop of the benign inflation data and soft housing numbers for August (released over the past weeks).

A growing number of analysts predict that the benchmark US Fed funds rate has hit a peak at 5.25 percent in this rate hiking cycle. US rate setters brought to a halt a run of 17 rate hikes in August. Some sections of the market are even betting that the Fed will have to reduce borrowing costs next year to prop up the economy.

Fed Funds futures are now discounting a 12 percent chance of a Fed rate cut by the end of February. According to the minutes of the last Fed meeting, six weeks ago all FOMC members were keen to avoid a signal that the Fed was done. With markets now pricing cuts the Fed may take the opportunity to massage expectations differently.

Also making the news was the Thai baht after the military coup in the country. The news led to a scaling back in risk taking with the dollar and Swiss franc emerging as the winners while the Australian and Kiwi dollars suffered falls. While markets seemed inclined to follow the recent pattern of buying the dollar generally on signs of financial market stress yesterday, the lack of a broader reaction to the Thai news in Asia now leaves markets free to focus on the Fed result.

The euro, meanwhile, continued to feel the effects of the slump in a key indicator of German confidence yesterday. The ZEW economic expectations index plummeted to minus 22.2 in September from August’s minus 5.6, coming in substantially below analysts’ expectations for a much more moderate drop to minus 6.9.

The ZEW index has now fallen for eight straight months, with sentiment dragged down by concerns over German exports in the face of a slowing US economy, as well as worries over rising interest rates, a stronger euro and a more restrictive fiscal policy.

Elsewhere, the Pound moved up after the Bank of England expressed concern about the possibility of a pick up in inflation, indicating that investors are pretty much resigned to the prospect of another UK rate hike in November. Also out yesterday, there was more evidence that the UK housing market remains robust despite the BoE’s first rate hike in 2 years in August.

The minutes of the central bank’s rate setting body revealed a unanimous vote in favor of no change in September. In general the tone of the report suggested nothing significant had changed since the August report to warrant a shift in policy, but the language also suggested there was a greater preoccupation with the upside risks to inflation than to the downside.

Most observers predict a quarter point rate hike in November when the BoE releases its next round of forecasts for growth and inflation. The minutes make it reasonably clear that there is likely another tightening to come in the current cycle, and November remains a close call.

Commodities- Oil dropped 2.63 percent to $61.59 and Gold gained marginally 0.51 percent to $586.2

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Euro hit hard following weak ZEW index

As Wise Money wondered yesterday, the Euro was hard hit yesterday following Germany’s ZEW index of economic sentiment dropped in September to its lowest level since January 1999. With one of the main factors for the decline being the impact of the rising interest rates in the eurozone. With this said, economists still believe that yesterday’s data will not prevent the European Central Bank raising interest rates to 3.5 per cent by the end of the year.

The Bank of England will release the minutes from September’s policy meeting this morning with expectations rife that there was a unanimous 8 – 0 vote in favour of keeping the base rate at 4.75 per cent. This could signify the end of the two day rally by the pound against the dollar.

With the Federal Reserve interest rate announcement this evening, the expectation is that there will be no change for the second month running as the policy makers remain divided over the costs of clamping down on inflation. The Fed’s case for doing nothing was strengthened yesterday following a plunge in home building and a drop in wholesale prices. The Fed will announce its decision around 7.15pm bst in Washington.

Gold extended losses early this morning as it tracked weaker crude oil and shrugged off a coup in Thailand, one of Southeast Asia’s main bullion consumers. Crude oil had its biggest fall in four months after U.S. President George Bush said he will give European diplomacy a chance to end the dispute in Iran, the world’s fourth-biggest oil producer.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Soft German ZEW data expected

The dollar drifted lower after a day of conflicting signals, with the slump in portfolio flows into the US denting sentiment eventually outweighing other factors.

The trading day started off quite well for the dollar, with the G7’s omission of any mention of recent yen weakness only serving to worsen the currency’s downtrend. The dollar, along with most other majors managed to gain on the Japanese unit.

That aside, the dollar got a fleeting boost earlier when US Treasury Secretary Henry Paulson said that the US will not budge from its strong dollar policy. He was speaking after annual talks of the G7 and the IMF.

Things changed, however, when the US Treasury revealed that portfolio capital flows to the US slowed sharply, to their lowest level in over a year, during July. Inflows during the month totaled just 32.9 bln usd in July, down from 75.1 bln in June and their lowest level since May 2005.

Significantly, the inflow was not enough to cover the trade deficit of 68 bln usd over the same month.The fact that the data is backward looking, but more importantly, the lack of attention to structural imbalances at present suggests that the dollar may escape from significant damage.

Earlier, the dollar ignored a wider US current account gap. The Commerce Department said the US current account deficit widened to 218.4 bln usd in the second quarter to reach 6.6 percent of GDP. The shortfall was wider than expected and the second highest ever. And, to make matters worse, the deficit in the first quarter was revised to 213.2 bln usd from the initial estimate of 208.7 bln usd.

Today, the dollar may weaken on speculation a U.S. government report will show the housing market is cooling, reducing the likelihood the Federal Reserve will resume interest-rate increases this year.

Elsewhere, the Pound stayed little changed after news that a growing majority of Britons are predicting a rate hike over the next 12 months, signifying a rise in inflation expectations.

The Pound rose last week versus the dollar and hit a two- week high against the euro as reports showed inflation quickened in August, property prices rose and sales at U.K. retailers rebounded in August. The U.K.’s biggest employers’ group said yesterday the central bank will need to lift rates to combat inflation, the first time it has called for higher borrowing costs.

Economic data due out today, The German ZEW economic expectations index is expected to ease further to minus 6.9 in September after plummeting to minus 5.6 in August from July’s 15.1.

Concerns about the strength of the US economy and the impact of the German VAT hike are likely to weigh again on the assessment of financial analysts’ expectations for the German economy. A possible limit to the downside might actually be given by the fact that the ZEW is now close to the levels it has been at previous troughs.

From the US, Producer prices are seen rising 0.3 percent in August, a pick up from 0.1 percent in July. For the second time this year, however, the CPI release preceded PPI and market reaction should be minimal before Wednesday’s FOMC meeting. Housing starts are seen rising about 0.6 percent to a 1.805 mln unit annual rate in August. Building permits are likely to rise slightly for the first time in 7 months to 1.750 mln units, still a 4-year low.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

G7 meeting still dominates forex thinking

The main headline this morning surrounds the G7 meeting. The major issue was the omission of the request for China to strengthen the yuan, expecting China will likely widen the existing trading-band and allow more flexibility in their currency ahead.

The other major point to note was the G7 statement excluding mention of the yen. While Tanigaki’s comments suggested the Japanese authorities are not concerned with the yen’s recent appreciation, going forward it is more than possible that the yen will continue to weaken as the terms of trade between Europe and Japan suggest a weaker yen is fundamentally appropriate.

Also in the headlines was ECB’s Gonzalez-Paramo stating that the ECB still sees growth in the euro zone intact despite prospects of further interest rate increases. When asked whether current interest rates are sufficient to slave off inflation the response given suggested that whilst a sequence of rate hikes were not predicted, the ECB remain vigilant to the risk of price stability close to 2%.

Last week a much anticipated US inflation figure brought muted reaction as August CPI came in +0.2% in line with expectations and validates the view that the US may be peaking on inflation pressures, therefore the Fed has room to wait and may not need to raise interest rates at their forthcoming meeting on Wednesday .

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.