Articles from April 2007



ECB keeps rates on hold at 3.75 per cent

The ECB announced that it would keep interest rates on hold at 3.75 per cent after its monthly rates setting meeting yesterday afternoon. The hawkish tone set by Jean-Claude Trichet, president of the ECB, didn’t involve his favourite phrase; “Strong Vigilance”, which he usually uses when indicating a possible rates rise in the following month, however he did insist that the bank would keep an eye on inflation risks and “act in a firm and timely manner”.

The explanation caused market participants to react by strengthening expectations of an interest rates rise in the very near future and caused the euro to jump to $1.35 against the dollar, a level that has not been reached for over 2 years.

Early this morning the dollar was seen trading at 1.9850, a level we have seen just once this year since as far back as October 1992 and on its way towards this year’s dollar high of 1.9917.

One of the reason for this dollar weakening was off the back of speculation that trade balance information out today may show the US trade deficit widening. This increased risk to the US economy was not helped by The International Monetary fund to revise its US growth forecast to just 2.2 per cent this year also citing the possibility of a housing recession in the US helping it slow down the economy.

The uncertainty on the state of US economy has left the Federal Reserve officials to conclude last month that while additional rate increases may be necessary, uncertainty about the economy could mean that this isn’t the only option available.

So the direction of the US interest rate level is still an un-answered question in the minds of many market participants, however today’s key PPI and university of Michigan confidence data could help answer this question.

Back here in the UK housing data out showed that prices had not shown any signs of slowing down despite the recent rate increases by the Bank of England, causing speculation that the BoE may need at least one more rates increase possibly as early as next month.

UK house price inflation picked up in March despite easing up in previous months according to the RICS housing market survey. There were arguments in favour of the doves in the BoE rate setting gang as well as the UK’s trade deficit widened by more then expected in February as Imports outstripped exports.

The difference between imports and exports was up £200m to £4.3bn according to the Office for National statistics.

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.

Wise Money reflects on UK growth

Data from the British Retails Consortium, out last night, showed no signs of a slow down in UK consumer spending. Healthy growth in March gives further support to those pushing for a rates rise as early as May.

Retail sales growth was up from 5.6 per cent last month to 6.2 per cent for March an increase that was expected by the market but not by such a high margin.

Further upside for the Pound against the euro and Dollar was helped by an interesting article in the FT, about overseas dividend payments possibly being exempted from UK taxes.

The FT report explaining that the UK Treasury could possibly allow UK based companies to repatriate money made from foreign profit tax free, which was the key element, was welcomed by many and the positive boost was hence reflected with the Pound strengthening. As a result the Pound hit a high of $1.9815 and €1.4750 yesterday afternoon.

This afternoon the ECB will meet to discuss interest rate levels with the market expecting them to keep rates on hold at 3.75 per cent. However with the Hawks circling and the inflation argument ready to be used, the market players are looking to see if Jean-Claude Trichet opts to use the term “strong vigilance,” his typical signal that rates will be lifted at the next policy meeting.

Across the water in Asia the Japanese Yen felt further pressure from the carry trade, a speculative strategy where investors borrow low-yielding currencies and lend high-yielding ones, which has helped weaken the Japanese currency as of late.

The low Japanese interest rate, which is currently just 0.5 per cent, has been put in place by the Bank of Japan to further tighten monetary policy and help nurture economic recovery. The pressure on the Yen is being mostly inflicted by the high yielding currencies of the Australian and US Dollar as well as Sterling.

Over in the US the Federal Open Markets Committee meeting notes from March explained that Inflation was “uncomfortably high”, with the Fed seeing inflation as the “predominant concern” for the US economy.

The Fed explained that further policy firming might be needed to cool inflation but also mentioned that there was clear concern about the US economy’s growth. The explanation left some market participants in double mind as to whether the Fed will raise rates any time soon citing the FOMC communication as being slightly inconsistent.

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.

Dollar falls amongst further tension with China

The Dollar fell sharply against the Pound and the euro yesterday amongst further tensions between the US and China. The Dollar fell around 0.6 per cent against the euro to $1.3439 and by roughly the same margin against the pound to $1.9740.

The intensified tension followed China’s stance to decline an invitation to take part in the G7 talks which are to be held in the US. This seems to be tit-for-tat retaliation against the Americans complaint to the World Trade Organization over arguments about intellectual property rights and China’s restrictions on foreign book and film sales.

Although we are still far away from the dollar high this year against the pound, the added pressure on the US economy, despite strong non-farm pay roll figures last week, has pushed £/$ further in that direction.

An expected result in Europe is rate changes by the ECB and BoE but the question is how soon and in what direction? The consensus in the UK is that there may be a rate increase as soon as May with recent economic data showing UK inflation edging up and retail sales still growing strongly.

The ECB meets this Thursday to discuss the state of the European economy and with the hawks circling over the past few weeks with one hawk, Austria’s Libscher, citing the reason that “everything that is necessary needs to be done to keep inflationary expectations where the are”, they could possibly follow in the same direction.

As mentioned in yesterdays Wise Money report the commodities market may be a key area to keep an eye on this year with oil and gas key components in every economy especially those that are highly dependant and high consumers like the US. An aggressive stance by President Hugo Chaves of Venezuela to take control of several major oil projects owned by American and European companies by May 1st will add further tension, just as it has seemed to ease off after the UK-Iran issue.

Commodity linked currencies have done well this year for instance; the Australian dollar hit a 16-year high against the dollar on Tuesday. Brazil’s real touched a six-year high versus the dollar on Monday and the Canadian dollar recently rose to its highest level since December 2006.

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.

Wise Money reflects on UK loans rates

As this was a quiet trading period in Europe due to the extended bank holiday there is not much to report, however as people prepared to close down for the approaching Easter weekend on Thursday last week, the Bank of England announced that it would keep base rates on hold at 5.25% for the third consecutive month.

Attention will now turn to the minutes which are due on 18th April for any indication of when rates are next to due to go up, with many commentators expecting a possible rate hike in May.

A close eye will also be kept on retail sales data released by the British retail consortium this week which may add fuel to fire for those on the MPC wanting a hike in rates with more relevance on the PPI and CPI data out early next week.

Across the water the US dollar weakened due to a number of reasons, specifically the concerns over the US-China trade tensions, the strength of the Australian dollar which was backed by a strong NAB survey and ANZ job data and the on-going concern with the sub-prime mortgage sector.

The short fall in substantial economic data apart from the solid data out last Friday showing stronger than expected job creation and stronger-than-expected non-farm payrolls data will have helped limit the dollars weakness where it seemed market participants were reacting to the slightest noise created.

In the commodity markets the recent drop in oil prices due to the easing of tensions between the UK and Iran is also a story worth keeping an eye on because the impact oil has on the state of the US economy.

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.

UK holds interest rates at 5.25%

The cost of borrowing remained at 5.25 per cent on Thursday but a large majority of economists expect the Bank of England to deliver another increase in May.

The Bank’s decision not to change its main interest rate followed evidence that industrial growth is slowing and the housing market may be losing some of its vigour – and it suggests the Bank is prepared to wait and see whether the three previous increases since August have cooled demand.

Analysts had been divided about the chances for a tightening of monetary policy this week.

The Bank’s own forecasts have suggested another quarter-point increase is necessary to push inflation back down to its 2 per cent target from a current annual rate of 2.8 per cent.

The absence of a move in April makes it increasingly likely that the mooted increase will be delivered in May, when the Bank publishes it next quarterly inflation report.

The view that the Bank’s monetary policy committee would stay its hand this month had gained ground on Thursday morning after the Office for National Statistics said UK manufacturing output contracted unexpectedly in February.

The 0.6 per cent fall in output between January and February was the second month in a row the sector had shrunk and marked the biggest decline since October 2005.

After adding the mining and utility sectors, industrial production as a whole fell by 0.2 per cent month-on-month, a much weaker performance than analysts had forecast.

The underlying trend was also weak. In the three months to February, manufacturing fell by 0.2 per cent, a decline matched by overall industrial production over the same period.

However, the MPC will also have had to consider data, published since its last meeting, that has shown inflation nudging back up, strong business investment, rebounding financial markets and firms exhibiting more pricing power.

Countering those factors is the apparent lack of any serious wage inflation and a slowing housing market.

The Halifax said on Thursday that house prices rose by 1 per cent in March but that the the first three months of the year saw prices climb by 2.8 per cent compared to 4.2 per cent in the fourth quarter of 2006.

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.

Currency converter wise money waits

Sterling traded at 69 day highs against the USD as the market remains focussed on the Bank of England meeting tomorrow. The median forecast from economists polled by Reuters last week gave a 25% likelihood of an April hike.

The euro held steady above the 1.33 level against the dollar with the markets eagerly awaiting further data in order to determine the scope for further interest rate hikes from the ECB over the coming months. Yesterday saw the release of PMI services for May.

The increase in oil prices and seemingly in some materials is affecting industry costs in the euro zone and fuelling inflation. It is slightly different from the scenario we had towards the end of last year when everybody believed in the oil and raw material market calming down.

Elsewhere the Reserve Bank of Australia announced the decision from its monetary policy meeting earlier, deciding to leave rates unchanged at 6.25%. Although markets’ expectations were mixed the reaction following the announcement was uniform, with a knee-jerk reaction lower in the Aussie however by the time trading in London opened we are back to levels seen before the announcement.

The Australian dollar was said to be supported by firmer industrial metals prices and the return to favour of the carry trade. There is also a widely held view that the market simply deferred its expectations for a rate hike in May, rather than cancel it.

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.

Growing speculation of UK rate hikes

The tension mounts ahead of the Bank of England rate announcement on Thursday. Sterling has been benefiting from increasing data backed speculation that there will be another rise of 25bp taking base rates in the UK to 5.50%.

Yesterday the UK published figures showing homeowners profiting from soaring house prices to fund consumer spending alongside buoyant conditions in the manufacturing sector.

Equity withdrawal in the quarter rose dramatically to £14.6bn from £12.2bn in the previous three months. Also adding fuel to the fire is the upbeat manufacturing data of late.

The latest purchasing managers’ survey of manufacturing showed that over the first quarter as a whole the UK is still experiencing the fastest expansion in British industry for nearly three years, with new orders at their strongest since the end of 1999.

The US also had PMI data out yesterday. US factory activity grew in March but at a slower rate than in February with a jump in prices paid but contraction in employment.

The data suggests moderate manufacturing sector growth while price pressures fuelled by higher energy prices continues unabated. The prices data will provide another indication that the Fed cannot be complacent on the inflation side even with soft growth.

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.

Rate expectations boost Pound

The Pound climbed to a two month high against the dollar on Monday as the chances of a near term rise in UK interest rates climbed despite a report that suggested UK manufacturing growth slowed in March.

The UK purchasing managers’ index fell from 55.4 in February to 54.4 in March, a larger than expected fall.

Meanwhile, data revealed a sharp rise in UK mortgage equity withdrawal in the fourth quarter. reflecting UK households increasing willingness to translate rising household wealth into a more liquid form of spending power.

The pound rose 0.2 per cent to $1.9730 against the dollar and climbed 0.2 per cent to £0.6779 against the euro.

Elsewhere, the euro was little changed against the dollar at $1.3350 as investors shrugged off a slight dip in the eurozone manufacturing purchasing managers’ index in March.

Analysts said the market’s focus would switch to the US Institute of Supply Management’s survey of the US manufacturing sector, due at 14.00GMT, for clues as to the future path of US interest rates.

The yen was flat at Y117.80 against the dollar and unchanged at Y157.30 against the euro, showing little reaction to Japan’s quarterly Tankan report, which showed Japanese business confidence deteriorating for the first time in a year.

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.