Articles from August 2007



Weak data undermines currency converters

The dollar fell back slightly following weaker than expected weekly jobless claims figures, though losses were limited as a weaker opening on Wall Street heightened investors’ risk aversion.

The Labor Department reported 334,000 new claims for the week ending August 25, while economists had predicted 322,000 new claims. That was the most new claims since 341,000 in the week ending April 14 and prompted concerns that troubles in the US housing sector are spreading to the labour market.

However, with financial markets remaining volatile the dollar’s fall was relatively low, with investors’ attention focused on the weak opening on Wall Street. In the current environment movements in other markets, rather than data are what’s driving currencies, and rising risk aversion is helping support the dollar.

Risk aversion supports the dollar as investors withdraw funds from riskier overseas assets, converting them into the US currency.

Meanwhile release of revised US second quarter GDP figures – which revised the annual growth up to 4.0 % from the previous estimate of 3.4 % had negligible impact on the dollar, being largely in line with analyst expectations.

Prior to the data release, the dollar had been firming, boosted by expectations that the Federal Reserve will cut its key Fed funds target rate from the current 5.25% at its next rate-setting meeting on September 18.

Though a prospective rate cut reduces the dollar’s yield attraction, the US currency has garnered some support from more hopes the Fed will do enough to prevent the US economy from sliding into recession in the wake of the sub-prime crisis.

Now attention will turn to today’s speech by Fed chairman Ben Bernanke at Jackson Hole, with market participants looking for hints on whether the cut will materialise.

Bernanke is likely to leave many in the market disappointed and play down the prospect of a cut, emphasising that the Fed will only lower rates as the economy slows, and not because of what’s happening in the markets.

Meanwhile the Pound continued to climb, boosted by data out yesterday morning suggesting that the Bank of England’s 125 basis point rise in interest rates in the space of a year is still yet to bite. Figures from the BoE showed mortgage approvals, a key gauge of future activity in the housing market remained stable at 115,000 in July, unchanged from June and above expectations for a dip to 110,000.

This strength in activity will provide ammunition to the hawks in the Monetary Policy Committee and as such keeps the options open for one more rate hike.

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

The dollar firmed slightly against the yen as some sort of calm returned to US stock markets following Wednesday’s sharp declines which prompted another up tick in risk aversion to the Japanese currency’s benefit.

By 4 pm London time yesterday, the Dow Jones index of leading shares had more or less recouped Wednesday’s 100 plus point decline, while the Nasdaq was up 1 %. Further volatility in asset markets is likely to be the key driver and will likely keep high-yield currencies trading in a choppy fashion.

Despite yesterday’s slight reversal in risk aversion, the markets remain in jittery mood. This is sparking more speculation that more needs to be done by the major central banks, putting a positive gloss at the front end, steepening curves and boosting the demand for mainstream government debt.

The new loss of appetite for risk is hurting stocks, denting credit market sentiment and leading to further unwinding of carry trades.

This unwinding of carry trades, where investors borrow in low-yielding currencies to buy higher-yielding assets has seen the dollar fall from a high of 124 yen in mid-June to a low of below 114 in mid-August, while the euro has dropped from just below 169 yen in mid-July to around 150 in mid-August.

In addition, investors reckon some solid Japanese data coupled with continuing difficulties in the US sub-prime market will help the dollar recover further ground in the days and weeks ahead.

With a raft of high profile Japanese economic readings due before the month end, including retail sales and CPI, plus the prospect of further bad sub-prime news emerging from the US, additional gains for the yen would seem to be of little surprise.

If the Japanese data comes in as expected, then the Bank of Japan is widely expected to raise interest rates from their current super-low level of 0.50 % next month.

The next key event for financial markets is Friday’s speech from US Federal Reserve chairman Ben Bernanke in Jackson Hole, Wyoming. Most observers reckon that he may signal that the Fed is ready to cut its key Fed funds rate from the current 5.25 % at the next meeting on Sept 18.

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.

Weak data undermines currency converters

The dollar came off day lows after a key indicator of US consumer confidence came in a touch above expectations, even though the gauge did indeed weaken.

The closely watched consumer confidence index released by the Conference Board fell to 105.0 in August from a downward revision to 111.9 in July. Wise Money had predicted a steeper plunge to 104.5. The recent turmoil in equity and credit markets was no doubt a big negative factor but, to some extent, it will have been offset by the recent declines in gasoline prices.

Yesterday, equities were shaky with key indices in Europe all down, alongside falls on Wall Street. Against this backdrop, currency markets are likely to see bouts of volatility as risk appetites ebb and flow.

Any dollar strength is likely to be inconsistent as long as US data remain weak. Unless we start seeing some very robust signals out of the US, perhaps suggestions that the population is willing to spend its way out of a recession, then further volatility will follow.

The latest dollar-hostile developments include Monday’s existing home sales figures for June, which showed inventories of unsold homes at a 16-year high, and a report in yesterday morning’s Times that US bank State Street has 22 bln usd of exposure to debt conduits, the off-balance sheet vehicles that have contributed greatly to the uncertainty in financial markets.

Signs that there are more knock-on-effects to come from the credit crisis have previously helped the dollar as risk sentiment waned, but further bad economic news flow is now fuelling speculation the Federal Reserve will cut interest rates to prevent harm to the wider economy.

The yen has also been volatile, strengthening since Monday as risk appetite is dented by the bad news out of the US. Weakening risk sentiment supports the yen as it means investors refrain from the risky carry trade strategy of selling the low-yielding Japanese currency to invest in higher-yielding ones.

Meanwhile, the euro stayed well bid after a stronger-than-expected key German business survey and robust money supply figures for the 13-nation single currency area.

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.

Weak US housing data causes high yielding currencies to fall

Sterling weakened against the US Dollar and Euro in overnight trade on the back of further concerns in the global equity market caused by weak U.S. housing data and the further easing of market interest in carry trades.

The decreasing investor interest in carry trades put pressure again on other higher-yielding currencies, with notably the New Zealand Dollar falling sharply against the US Dollar and the Yen.

The Australian Dollar also dropped again this morning with the weak housing data and carry trade issues continuing to make its mark on the majority of these types of currencies.

German IFO for August was higher than expected this morning even though it showed a slight drop to 105.8; this is down 3 points from the previous report for July. However this said, the outlook for the near future is still positive with IFO president Hans-Werner Sinn commenting “it is still marked by optimism, albeit somewhat weaker”. The euro strengthened gradually following this report.

Oil rose in early trading, supported by tight US gasoline supplies and expectations a weekly report is expected to show motor fuel supplies have been squeezed again across the Atlantic. A US report is likely to show that gasoline stocks fell unexpectedly by 5.7 mln barrels last week.

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.

Yen rallies as risk aversion returns

The yen rallied on Friday as risk aversion returned to global markets following several sessions of relative calm.

An overnight drop in US equity markets was followed by falls in Asian stocks. But trade was light with few investors wishing to take fresh positions in the face of uncertainty about the timing of the next rate move from the US Federal Reserve.

During most of the week, currency speculators had begun to re-enter carry trade plays, a risky strategy of trading interest rate differentials, where gains can easily be wiped out by sudden, volatile moves in prices.

Signs on Friday that volatility was returning prompted the unwinding of some of these positions, which benefited the yen, which is usually sold off to fund carry trades.

The yen rallied 0.4 per cent against the dollar to Y115.91, and fell 0.2 per cent to Y157.54 against euro.

The euro was broadly higher against most other currencies, however, after eurozone business activity remained robust in August.

The composite purchasing manager’s index, which compiles data in the region for both manufacturing and service industries, fell slightly to 57.2, from 57.5 in the previous month, but most analysts suggested the data remained strong enough to indicate a rebound in growth in the second half.

Sterling fell 0.3 per cent against the euro to £0.6782 and by 0.2 per cent to $1.3594.

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 takes lead from the ECB

The euro firmed after the European Central Bank gave a clear hint that it is still on course to raise borrowing costs next month despite the recent turmoil in the financial markets.

In a statement, the ECB confirmed yesterday that its monetary policy stance has not changed from earlier in the month when the bank’s chief Jean Claude Trichet reinforced expectations of another quarter point increase in the key refi rate to 4.25 %.

His use of the code words ‘strong vigilance’ on August 2 was widely seen as a precursor for a rate hike. Since then, however, the troubles in the US subprime market have led to steep falls in markets around the world, and in turn leading to some doubt whether the ECB will indeed continue hiking interest rates.

As this phrase has been used to signal every rate hike in the recent cycle, this supports our view that the ECB is likely to make good its promise for a September hike. Indeed, if growth rebounds in the coming months as the surveys suggest, another hike in December, to 4.50 % is still a possibility.

While the ECB is poised to raise interest rates, the US Federal Reserve could be on course for a rate cut.

The Fed’s chairman Ben Bernanke said on Tuesday that he was ‘absolutely’ prepared to use all the tools at his disposal to address the credit crisis in the US financial system, according to Senator Chris Dodd, chairman of the Senate banking committee. Dodd reported Bernanke’s comments to the press after a closed-door meeting with Bernanke and Treasury Secretary Henry Paulson.

Elsewhere, the pound was buoyed by a much stronger than expected survey on the UK manufacturing sector.

The Confederation of British Industry revealed that a balance of +9 % of firms polled reported that their order books were above normal in August – the highest level for more than 12 years.

An imminent rate hike from the Bank of England is not expected after last week’s news that annual CPI inflation dropped below the 2.0 % target to 1.9 % in July from 2.4 % in June.

Still, a return to calmer conditions in financial markets in the near-term combined with a likely acceleration in CPI inflation in Q4, due to base effects from the large decline in oil prices late last year, could still see the BoE raise rates one final time to 6.00 % by year end.

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 rates stabilised as Yen carry trades strengthen

The yen recovered further ground as equities came well off their highs, with the positive sentiment following the US Federal Reserve’s 50 basis point discount rate cut on Friday beginning to wane.

The Japanese currency suffered in the wake of Friday’s Fed announcement, coming well off the two and a half month highs reached against the dollar late last week as a measure of risk appetite began to return to the market.

This trend had reversed moderately yesterday, however, with most feeling that the boost to equities and risky assets from the Fed’s move, which most have interpreted as a prelude to a cut in interest rates next month, will be short lived.

Trading continues to be jittery, with a great deal of uncertainty remaining as to just how deep-rooted the credit crisis is, the extent to which it will spread to the wider economy and whether central banks can ease the problems significantly.

There is a general lack of conviction in the markets right now, and that will not change until we get to the end of the week, and traders can see whether or not US markets have the resilience to hold in, or whether last week’s dent in investor confidence, and the official 10 % correction is something more than that.

Among currencies, the yen as a low-yielding currency has been the main beneficiary of the recent turmoil as a result of the credit crisis as investors rapidly unwound risky carry trades, where money is borrowed in low-yielding currencies in order to invest in higher-yielding assets elsewhere.

Meanwhile, the euro and the pound held onto gains against the dollar garnered on Friday after the Fed discount rate cut, as the US currency had gained support from safe haven flows during the financial turmoil.

The pound was further buoyed yesterday after figures from the Bank of England revealed an unexpected rise in its broad M4 measure of money supply during July, as well as strong public finances data.

There were also solid mortgage lending figures from the British Bankers Association and the Council of Mortgage Lenders, although these were offset slightly by soft numbers from the Building Societies Association.

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.

Feds action on Friday- is it a sign of more to come?

In a surprise move on Friday, the Federal Reserve cut the interest rate it charges on direct Fed loans to banks by a half-percentage point to 5.75.

The Fed’s actions followed a month-long slide of more than 1,100 points on the Dow Jones industrial average and eased credit shortage fears in the equities market.

The discount rate is normally set 100bp over Fed funds, so the penalty is now reduced to 50bp but this is not the only significant factor in the Fed’s actions. Borrowing at the discount widow is typically overnight, but now 30 days is acceptable and renewable, so the loan can be extended indefinitely.

Concerns about who might hold dreaded subprime-related assets in their portfolios left many lenders suspicious and wary of handing over money. The Fed’s message to the financial community seems to be, it is safe to lend as normal, and the central bank will be standing close by.

Speculation is a favourite pastime for the financial community and last week provided some particularly juicy commentary. Is the Fed preparing to act in its role as lender to a financial institution if one were in trouble? Is the Fed laying the groundwork for an interest rate cut?

Despite U.S. reports that it will maintain a moderate pace of growth, the credit market turmoil is fuelling fears of recession.

Asian markets rallied sharply today, realising some of their biggest one-day gains this year as the Federal Reserve’s cut in the U.S. discount rate calmed fears of an economic slow down.

The yen steadied against the U.S. dollar in early trade this morning and it is predicted that if financial markets settle down this week it is likely that the yen will give back some of the ground it made up during last week’s carry trade unwinding.

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.

Sterling currency converts to 2 month euro low forex

Yesterday saw the British Pound hit a two month euro low dropping below 1.4800. The move was driven by technical model traders and hedge funds selling the GBP, pushing the GBP/EUR lower.

The GBP was also hit against the USD falling from 2.0460, in early trading, to just below at 2.0300 (more than 160 points on the day). The fall in the GBP/USD happened despite the ongoing concerns over sub-prime mortgages in the US.

The USD also strengthened against the EUR by the US afternoon. Despite gaining against the EUR and GBP yesterday the USD index hit a 15-year low dropping below the key 80-mark. The dollar index, an indication of the USD value against six major currencies, hit a level of 79.957 last seen in September 1992.

The market is awaiting today’s FOMC policy announcement expecting the base rate to be left unchanged at 5.25%. Great attention will be paid to the accompanying FOMC statement which is expected to acknowledge further decrease in the housing market due to the sub-prime disaster.

The reaction of US equities, treasuries and oil to the FOMC statement will be closely watched. The stock market acts as an indicator to measure risk appetite as investors compensate risky carry trades meaning borrowing in a low-yielding currency and investing in higher-yielding assets. If the wording of the Fed deviates significantly from the previous statements and more specifically if it hints at rate cuts there could be significant movement in the market.

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.