Articles from November 2007



Weak US home sales worries currency converters

The dollar turned lower after weak US new home sales data more than offset an earlier upward revision to third quarter GDP, while the Pound lost further ground against the euro at the end of a busy day for UK news.

Although US new home sales rose by 1.7 % to 728,000, the reading came in below the 753,000 expected due to substantial downward revisions to previous months. September’s reading now stands at 716,000, the lowest rate since January 1996.

The news offset earlier news of an upward revision to US third quarter GDP growth to an annual 4.9 %, the fastest pace of growth in four years. The news had nevertheless failed to give the dollar much of a boost, given the emphasis on the weak outlook for the fourth quarter.

With a large upward revision to third quarter GDP already priced in, the greenback’s reaction was muted as players see the third quarter number as solidly in the rearview mirror. The real concern is that fourth quarter GDP may come in below 1.0 %, perhaps well below.

Meanwhile, with the outlook for US growth and interest rate differentials looking increasingly bleak, the dollar remains out of favour. The US dollar had gained earlier in the day on the back of a continued correction after last week’s substantial falls against the euro.

It also benefited from gains in US equity markets, though these followed suggestions by the Federal Reserve’s vice chairman Donald Kohn overnight that interest rates will be cut in December, a move which is likely to be negative for the dollar.

Elsewhere, the pound continued to lose ground, particularly against the euro, on growing speculation that the Bank of England will cut interest rates possibly as soon next month, or at least early next year.

This followed a very busy day in the UK. Bad news came on the housing front, with the latest Nationwide survey showing a 0.8% monthly fall in house prices, the biggest drop for 12 years, while the Bank of England reported mortgage approvals at their lowest since February 2005.

This was somewhat offset by a stronger-than-expected CBI retail sales survey, which also showed a massive jump in high street prices, but the market largely shrugged this off. The testimony by members of the Bank of England’s Monetary Policy Committee before MPs yesterday morning highlighted the highly uncertain outlook for the UK economy and the risks of both a sharp slowdown in economic growth and a spike in inflation.

This left market players concluding that rate-setters are edging nearer to cutting interest rates, but next week’s decision is certain to be a very close call.

While the incoming economic news has made the case for an immediate cut far from clear, the recent resurgence in financial market turmoil may prompt the MPC into action. Even if the nine-member body opt to hold fire for the time being, however, they will not put off the inevitable for much longer.
Prices at the London open
GBPUSD – 2.0662
GBPEUR – 1.4012
EURUSD – 1.4743
GBPJPY – 227.44
GBPCHF – 2.3122
GBPAUD – 2.3272
GBPCAD – 2.0566
GBPZAR – 14.0838

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 calm on quiet data

Major currencies remained in narrow trading ranges, with a dearth of data meaning focus was on global currency imbalances and credit worries.

The dollar is hovering around a cent off its all-time low against the euro and its weakness is causing some friction within major exporters such as China.

Chinese Premier Wen Jiabao pledged on Monday to resolve trade imbalances after the country’s surplus hit a record high in October, and to work to let the yuan move more freely.

A stronger yuan would make Chinese exports more expensive overseas. Wen said China will work to “increase (the currency’s) flexibility and gradually make the yuan convertible under the capital account”.

However European Central Bank president Jean Claude Trichet, speaking at the meeting of central bankers in Cape Town, refused to make any specific comments on the strong euro.

Instead he reiterated previous comments that “excess volatility in currency markets is undesirable”. EU economic commissioner Joaquin Almunia made similar comments later in the afternoon saying that the euro’s recent moves may be brutal but fundamentals are the ultimate factor in respect to free market volatility.

Later this week, attention should switch back to fundamentals. The minutes to the US Federal Reserve Oct 31 rate decision come today and investors will be looking for any signal that borrowing rates will come down again in December, following a quarter-point cut at the Oct 31 meeting.

With the market relatively confident about the prospects for a rate cut in December, the risk is these expectations will be disappointed somewhat, which would be positive for the dollar and negative for risky assets.

The pound recovered slightly after dropping following more gloomy news on the UK housing market. The latest Rightmove house price survey showed the average asking price was 0.7 % lower in November compared to October. In the UK the main focus later this week will be on the Bank of England’s minutes to its rate decision earlier this month.

The central bank left rates unchanged at 5.75 % but the subsequent, surprisingly dovish Inflation Report, along with weak housing indicators, has raised expectations for a cut in the coming months. Investors will be keen to see whether the Monetary Policy Committee was divided in its decision.
Prices at the London open
GBPUSD – 2.0557
GBPEUR – 1.4000
EURUSD – 1.4698
GBPJPY – 226.96
GBPCHF – 2.2920
GBPAUD – 2.3145
GBPCAD – 2.0140
GBPZAR – 13.7903

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.

Mixed data wobbles currency converter

The dollar was steady in the wake of a raft of conflicting data, headlined by sturdy inflation figures that will exacerbate the dilemma for the Federal Reserve Bank as the economy shows signs of slowing.

US CPI inflation met expectations with a rise of 0.3 % in October from September, giving a 3.5 % annual rate, the highest in 14 months. Strong inflation will make it harder for the Fed to cut interest rates again, following its 0.75 points worth of reductions since September, even though economic growth is expected to slow sharply in the coming quarters.

The monthly increase in inflation is actually the calm before the storm, inflation could hit a 16-year high of 5.0 % by the end of the year as gasoline prices continue to rise.

Jobless claims also painted a gloomy picture for the economy. Data showed there were 339,000 new claims for the week ending Nov 10, up 20,000 from the prior week and higher than expectations for a broadly unchanged reading.

On the flipside, the New York Fed’s manufacturing survey for November suggested business conditions remained firm in October, with the reading dipping to 27.37 from 28.75 in October. Expectations were for a sharper pullback to 19.00.

Elsewhere, the UK currency suffered particularly badly against the euro, which hit a four-year high of 0.7166 stg shortly after the data were released. Retail sales fell by 0.1 % in October from September, the first monthly fall since January and confirming the widespread belief that UK consumer spending is on a firm downward trend.

After Wednesdays dovish Bank of England inflation report, which all but confirmed that two UK interest rate cuts will be forthcoming next year, the weak figures will add to speculation that the first move could come as early as next month.

The BoE’s position contrasts with that of the European Central Bank, which has defiantly maintained its anti-inflationary stance despite the economic slowdown in the region.

Prices at the London open
GBPUSD – 2.0406
GBPEUR – 1.3997
EURUSD – 1.4586
GBPJPY – 224.54
GBPCHF – 2.2943
GBPAUD – 2.2993
GBPCAD – 2.0079
GBPZAR – 13.4263

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 regains forex faith

The dollar and yen remained softer, while the euro gained ground, after encouraging euro zone and US economic data and a higher open in stock markets helped investors’ regain risk appetite.

Equities were helped by US retail sales figures that showed a 0.2 % monthly rise in October, in line with the market consensus. At the same time PPI was up only 0.1 %, below expectations for a 0.3 % rate.

The encouraging news helped further improve risk appetite among investors, who returned to selling lower-yielding currencies like the dollar and the yen in favour of the higher-yielding euro and commodities-based currencies.

On top of this, the euro was helped early yesterday by robust 3Q GDP data, which showed a 0.7 % quarterly gain for a 2.6 % yearly rate.

The data have powered up the euro against the dollar… and with central banks and sovereign wealth funds eyeing an increased allocation into euro-denominated assets, the latest euro zone releases continue to show no considerable drag on growth as has been the case in the US and UK.

Meanwhile, the Pound steadied out at significantly weaker levels against major currencies following a dovish Bank of England inflation report, which gave a clear hint UK interest rates will need to fall.

The BoE’s inflation report forecasts showed that, if UK interest rates follow market expectations and fall to 5.1 % by the end of 2009, inflation will meet the BoE target rate of 2.0 %. If, on the other hand, interest rates stay as they are at 5.75 %, CPI inflation would undercut the target, coming in around 1.75 %.

November’s BoE Inflation Report gives a clear signal that a series of interest rate cuts lie ahead. The timing of the move is uncertain, particularly given Tuesdays stronger-than-expected UK inflation data, but the dovish inflation report will spark talk that a move could come before February.

The Pound plunged against the dollar, yen and euro following the report as investors adjusted their expectations for UK interest rates.

The European single currency, in particular, hit a four-year high low sterling of 1.4010 The European Central Bank is not expected to cut interest rates for some months as inflation remains significantly above target.
Prices at the London open
GBPUSD – 2.0592
GBPEUR – 1.4025
EURUSD – 1.4679
GBPJPY – 229.28
GBPCHF – 2.3093
GBPAUD – 2.2910
GBPCAD – 1.9839
GBPZAR – 13.4263

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.

Bank of England to cut interest rates

The Bank of England is poised to cut interest rates as many as three times in an effort to ease the pain of the credit crunch, it has indicated today.

In its closely-watched Inflation Report, the Bank said it could comfortably allow interest rates to drop from their current level of 5.75 per cent to around 5 per cent without inflation getting out of control.

It is the firmest indication yet that it is preparing to cut the cost of borrowing for the first time since August, 2005.

The first of the interest rate cuts could come as soon as next month, although most experts think it will be more likely to arrive in the new year.

The Monetary Policy Committee will then cut borrowing costs once more over the coming six months, before potentially dropping them once more thereafter, the Report indicated.

The Bank slashed its economic growth forecast, acknowledging that next year would be the hardest for the British economy for many years.

Governor Mervyn King also said that the housing slowdown had arrived, and said he expected house price inflation to drop even further in the coming months.

He said: “In comparison with August, the near-term outlook is less benign for both inflation and growth. Last week, the Committee judged that it was appropriate to leave [interest rates] unchanged.

“There will be some difficult decisions in the months ahead. But the MPC remains focused on meeting the 2 per cent inflation target in the medium term.”

He also warned that the credit crunch, which has pushed up borrowing costs for families and businesses, would go on for many months yet.

Mr King said during the press conference that he has not considered resigning, following criticisms of his handling of the crisis, which resulted in a run on Northern Rock – the first UK bank run since Victorian times.

He added that it was too early yet to consider his reappointment, which is due to be decided in the new 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.

Credit crunch weighs Dollar down

The dollar was trading in a tight range against the euro as fresh concerns about the global impact of the credit crunch prevented weak US consumer confidence figures pushing the greenback any lower.

The preliminary University of Michigan consumer confidence indicator for November fell to 75.0 from 80.9 in October, well below expectations for a reading of 80.0.

The figures are likely to boost expectations the Federal Reserve could cut interest rates again in December, with economists expecting US data over the next few weeks to come in on the weak side.

Unfortunately the situation is likely to deteriorate further given the ongoing deterioration in the housing market, the negative effects of falling equity markets and the erosion of purchasing power caused by the surge in energy costs, consequently we suspect the Fed will be forced into a December rate cut with rates likely to move below 4 % in the second quarter of 2008.

However, while gloom over the US economy weighed heavily on the dollar early on Friday, pushing it to a fresh all-time low against the euro of 1.4751 usd, markets were more concerned about the global implications of the credit crunch in the afternoon.

This meant the dollar was little moved by the confidence figures, with the greenback gaining some support as investors sold riskier high-yielding currencies. There was a significant pullback to 2.0855 against the Pound and 1.5651 against the Euro.

Rumours that UK banks have sustained heavy losses as a result of the US sub-prime crisis has caused risk aversion to rise, pushing the pound sharply off the recent highs and sending shares in London and Wall Street lower.

The pound’s dropped sharply due to speculation of large losses in the UK banking sector, this in turn boosted the yen as increasingly cautious investors pull out of the risky carry trade, where they sell the Japanese currency to invest in higher yielding ones.

Nervousness in financial markets has also been exacerbated by reports that a collateralised debt obligation (CDO), a specialist security made up of repackaged debt owned by State Street Corp is liquidating its assets. Many CDOs contain assets linked to the troubled US sub-prime sector.

Elsewhere, expectations that the European Central Bank may tighten its monetary policy also weighed on the dollar. EBC President Jean-Claude Trichet last week described the dollar’s weakness as “brutal.”

The recent comments from policymakers in the major economies suggest that the monetary policy path in the near-term between the US and the other major central banks could diverge further. The ECB may raise its key interest rates by 25 basis points to 4.25 % in December.

The ECB last week kept its rate at 4 %, though the European Union has raised the 13-country euro zone’s inflation forecast for 2008 to 2.1 % from 2 % this year. Consumer prices in the euro area rose 2.6 % in October from a year ago on record high oil prices. That was faster than September’s 2.1 % gain.

Prices at the London open
GBPUSD – 2.0847
GBPEUR – 1.4235
EURUSD – 1.4643
GBPJPY – 229.99
GBPCHF – 2.3433
GBPAUD – 2.3158
GBPCAD – 1.9715
GBPZAR – 13.4263

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 dollar under pressure from FED comments

The dollar sank across the board, hitting a new 26-year low against sterling, in the immediate aftermath of comments from US Federal Reserve Bank chairman Ben Bernanke.

The central bank chief said the Fed is ready to counter the inflation risks caused by high oil prices, suggesting US rate-setters will be reluctant to lower interest rates further despite some signs of slowing growth.

Further sharp increases in crude oil prices have put renewed upward pressure on inflation and may impose further restraint on economic activity. There is no Goldilocks scenario from Bernanke who sees risks from inflation and an economic slowdown, the worst of both worlds.

Currency markets have been expecting the Fed to cut interest rates again in December, following reductions in the Fed Funds rate totaling 0.75 percentage points since the summer.

The central bank has said these cuts, bringing the benchmark rate to 4.50 %, were a pre-emptive move to stave off an economic slowdown as the housing market continues to decelerate and financial markets slowly recover from their turbulent summer.

Despite Bernanke’s hawkish undertones, however, the dollar fell as markets appeared to focus on the negative economic tone of the speech. The US currency fell across the board, sinking to 2.11 against the pound, a new low since 1981.

The Pound had already strengthened to new dollar highs yesterday, after the Bank of England held rates at 5.75 %, quashing a growing minority view that it could reduce borrowing costs following a weak run of data. Nonetheless, analysts are convinced the next move in interest rates will be down, and some are speculating on a cut as early as next month.

With the economy facing the headwinds of previous interest rate hikes, considerable sterling strength, tightening credit conditions and rising energy costs, we see no need for the repo rate to remain at the present restrictive level of 5.75 %.

Mortgage calculators expect the first 25 basis point ease by February at the latest, with the clear risk that the BoE could begin as early as next month if leading indicators continue to soften rapidly.

The European Central Bank also held rates, at 4.00 %, a decision fully expected by markets. Most analysts believe the central bank will keep rates unchanged for some time as it tries to balance increasing euro zone inflation pressures with slowing growth.
Prices at the London open
GBPUSD – 2.1093
GBPEUR – 1.4367
EURUSD – 1.4680
GBPJPY – 237.38
GBPCHF – 2.3757
GBPAUD – 2.2789
GBPCAD – 1.9610
GBPZAR – 13.4263

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 hits $2.10 as dollar is dumped

Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign exchange reserves.

The Pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.

The greenback’s renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China’s National People’s Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.

Mr Siwei told a conference in Beijing: “We will favour stronger currencies over weaker ones, and will readjust accordingly.”

Besides sterling, the dollar was down against 14 of the world’s 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.

Sterling’s move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.

While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country’s manufacturing industry under pressure.

The flight from the dollar is helping to fuel oil’s assault on the $100-a-barrel mark and investors’ appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed’s loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages.

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 dollar under pressure from US data

The US dollar stayed under pressure even after news of strong job creation in the world’s biggest economy, with sentiment on the currency still depressed. During the course Friday, the dollar sank to yet another record low against the dollar, at 1.4525 usd.

Additionally, one US dollar is now worth only 0.9320 of the Canadian currency, a 47-year low. The Pound meanwhile, is steadily closing in 2.09 usd having set a series of 26-year highs.

There may be losses in equities this week amid fading hopes of another Fed rate cut in December alongside ongoing strains in the credit markets, potentially weak spending in the holiday season and the weakness apparent in the third-quarter earnings season.

If equities suffer steep falls, a drop in risk appetites may end up favouring the dollar as it is seen to some extent as a safe haven in times of greater volatility.

The dollar has been under sustained pressure ever since the troubles in the US sub-prime mortgage market emerged. The Federal Reserve’s response has been to lower interest rates, first by a half-point reduction in August and last week, a quarter-point cut, taking the base rate to 4.50 % in order to shore up the economy. Now though it is starting to look like the Fed will stop there.

In the meantime, the fallout from the sub-prime market has continued, with the Fed forced to pump another 41 bln usd into money markets on Thursday, its largest injection since the 50 bln it made after the September 2001 terrorist attacks on New York and Washington, prompting fears that the world’s banking sector may be into further multi-billion dollar writedowns.

Those concerns were accentuated by the news that Citigroup may be forced to slash its dividend to meet its capital ratio requirements.

Against this backdrop, Friday’s US jobs data, though keenly awaited, only managed to lift the dollar very briefly.

It was revealed that the US economy added 166,000 jobs in October, nearly double the 85,000 jobs the Markets had forecast. The unemployment rate, taken from a separate survey of households, held steady at 4.7 % in October.

The report confirms the need for a Fed rate hold. Despite higher gas prices and falling home prices, consumers will remain firm with the strong employment market coming into the fourth quarter. The strong report suggests the labour market is still holding up despite the recent credit crunch. We still expect to see more signs of weakness in the coming months, but those signs might not arrive in time for a December rate cut, we think January is still marginally the more likely time.
Prices at the London open
GBPUSD – 2.0868
GBPEUR – 1.4405
EURUSD – 1.4481
GBPJPY – 239.05
GBPCHF – 2.4064
GBPAUD – 2.2656
GBPCAD – 1.9493
GBPZAR – 13.4263
Have a great day!

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.

Nightmare on Wall Street far from over

Gnawing doubts are pervading the forex markets that even more large write-downs will follow.

The stock market has been full of ghoulish tales this week of major problems still to hit the world’s biggest banks. As Halloween passed on Wednesday, some analysts are warning the nightmare on Wall Street is far from over.

Shares in some of America’s biggest banks slumped to their lowest level in several years on fears they might have to take the pain of fresh multi-million dollar write-downs from their exposure to America’s sickly mortgage market.

Merrill Lynch, the world’s largest brokerage, yesterday led financial shares to their lowest level in two years after analysts at Deutsche said it may write down another $10bn for losses on sub-prime assets. Merrill’s shares tumbled almost 9pc to $56.93 in afternoon trading.

Rumours were circulating that Citi may be forced to slash its dividend to meet its capital ratio requirements while others were considering rights issues. Deutsche Bank said Citi may face “greater-than-expected write-downs in collateralised debt obligations and other structured products”. The bank’s shares slipped 4pc to $37.11.

Meanwhile, fears about European banks are also growing after UBS reported its first loss in years. Merrill Lynch, which itself last week wrote off $7.9bn, said UBS will be forced to make an additional $8bn write-down.

There were also warnings that Belgian-Dutch group Fortis could be vulnerable to a further deterioration in the US housing market and investors expressed frustration that ABN Amro, which was to publish third-quarter figures on Thursday, did not do, saying it would move to the same reporting timetable as new owner Royal Bank of Scotland. RBS is due to report its full-year results on February 28.

One seasoned trader said: “Some of these rumours may be coming from the fact that it has been All Souls’ Day this week, a holiday in several countries. But some of them seem real. The problem is, no one really knows. There’s a lot of worry out there as far as where is the bottom on financials.”

Having admitted there could be further problems, Wall Street’s blue-chip banks are now holding their breath to see what happens to the US housing market, in which many of their off-balance sheet vehicles are invested.

The signs are not promising. A key derivatives index tied to sub-prime mortgages, called the ABX, has hit new lows in recent days, signalling the value of mortgage-backed securities held by banks is weakening which could bring fresh write-downs.

Analysts said it was difficult to know the extent of the problems because it is almost impossible to put a value on the credit derivatives sitting on banks’ books.

One issue making it hard to get a clear idea is that banks do not have to assign what they believe is a market price to derivatives they hold, but can instead “mark to model” their holdings.

One analyst said: “A cynic might say marking to model is putting whatever price your proprietary trader says is the price.”

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.