Euro Pounds Currency Brief August 2007

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Wednesday 29/08/2007 Interbank
GB POUNDS / EURO 1.4726

Pounds:

Not much from the UK yesterday with the pound rallying over the high yielding carry trades and trimming a touch on cable. The Times this morning carries an article suggesting that a housing slowdown could potentially be on the cards. Amongst the reasons given were a US slowdown spreading over the Pond and the tightening of lending conditions thanks to the MPC. One limiting factor will be the supply issue with not a great deal of new houses being built in the UK.
The pound is looking nice and steady this morning however has dipped under 2.00 overnight on cable with strong demand for the US currency. No data or speakers due in the UK today.

Euros:

Yesterday the ECB’s Bini-Smaghi said markets had correctly understood President Trichet’s message that rates may not go up in September but may wait for October before raising to see if the recent credit worries continue or not. Yesterday the IFO yesterday came in slightly above expectations. Today we have GFK from Germany which is expected to dip slightly with August’s recent problems.

General News:

• Another good performance from the yen as carry trades reverse heading towards month-end.
• Asian equity markets dropped as confidence in the US markets flagged. The Nikkei was down 2.25% earlier this morning.
• From Switzerland today the all-important KoF indicator is released at 1030BST.
• Oil markets dropped again yesterday and overnight with falling stock markets. US inventories as usual
today so there should be some volatility this afternoon. Oil is now trading $71.52.

Tuesday 28/08/2007 Interbank
GB POUNDS / EURO 1.4713

Pound:

A quiet day yesterday which came as no surprise given the UK Bank Holiday. The pound remains fairly firm with the base rate still running at 5.75% with the futures markets suggesting more to come. The upshot is that sterling is still seen as an attractive investment.
House prices in the UK may fall according to analysts especially in Central London if bonuses fall and employment dips. Recent data has showed the rising cost of mortgages has cooled the housing market.
Former MPC member Nickell said that the MPC is ’institutionally hawkish’ and fears that they could go too far.
Sterling has trimmed off this morning in early trade falling from the open. No data of note or central bank speakers set for today.

Euro:

Trichet threw the cat amongst the pigeons yesterday by casting doubt on a September rate rise. He said the ECB won’t make a decision on rates until the next governing council meeting on 6th September. Given what has happened since the last statement on 2nd August in the credit markets, it would be no surprise if rates did remain on hold.
German regional CPI data is the highlight of the day today along with the notoriously volatile IFO.

General News:

• Overnight the BOJ minutes from July noted that the bank had fears over a sub-prime fallout spilling into global markets. Also noted was the gradual approach to raising rates is a ‘good pace for taking extra stimulus from the economy’.
• The Bank of Canada sees increased risks to the Canadian economy and needs to readjust expectations given the change in credit conditions.
• Oil continued to rally as concerns over supply continue to worry traders however with the summer driving season coming to a close, refineries should be switching to winter blends. Oil is $72.06.

Friday 24/08/2007 Interbank
GB POUNDS / EURO 1.4743

Pounds:

Sterling had a good day at the races as it surged against the yen and broke the $2 barrier. It benefited from the carry trade coming back into play as the yen was sold off and the pound was one of the benefactors.
There were clear signs that risk appetite was returning to the market as investors piled back into the carry trade. But as other higher yielding currencies benefited as well, the pound weakened off slightly against the Aussie, Kiwi and Rand. Data out today will focus on the GDP figures which are due out at 9.30am UK time.
Previous month it was 57.5 and consensus is a fall to 56.9

Euro:

The Euro is still rallying on the back of the markets view of a possible rate hike next month. The ECB’s injection of €40 billion on Wednesday is also helping the single currency. It also benefited to a degree on the back of the carry trade. Against the dollar it hit 1.3588 then retreated to 1.3535.
Data released today to watch will be the PMI Manufacturing which last month was 54.9 and expected at 54.4.
Also PMI Services which last month were 58.3 and expected at 58.0. £1 buys approx €1.4740

General News:

• The BOJ left interest rates on hold yesterday after a two day meeting, but analysts felt a tightening had merely been delayed due to recent market turmoil. It is felt that a hike by 25bp is likely in its October monetary meeting.
• Investors look to go into higher risk markets as the Turkish Lire and South African Rand both rallied.
• Wheat prices jumped to an all time high yesterday as panic buyers rushed the market amid tight supplies, raising fears of a global food inflation spike. Poor weather is the focus of the blame as Europe, Australia and the US have seen extreme weather conditions which have produced a poor crop 

Monday 20/08/2007 Interbank
GB POUNDS / EURO 1.4714

Pounds:
Sterling made modest gains versus the dollar on Friday but has since slipped back below the $1.99 level.
With little in the way of key economic data, fundamentals are likely to continue to be overshadowed by concerns about events in credit markets and the implications that they could have more monetary policy. Markets, however, will be keeping a close eye on the outcome of the Bank of Japan’s policy meeting, which is due on Thursday morning. In the UK, markets will be looking to any available data for direction on the outlook for monetary policy. 

The second estimate of Q2 GDP will be key as it should provide details on the main growth drivers. The CBI industrial trends survey also features and markets will be closely watching the price components given the BoE’s concerns about a build up in pricing power in the manufacturing sector. Sterling looks set to remain vulnerable as markets scale back their expectations for UK interest rates hikes. The Hometrack

Euros:
In the euro zone, one of the main releases of the week is the German ZEW index for August. The headline reading is expected to fall again this month, though this is hardly surprising given that the survey is based on a poll of analysts in financial institutions and companies. Furthermore, the index has proved itself to be poorly correlated with surveys of real activity.

General News:
• Investors continued to flee risky investments, with the yen continuing to gain while high-yielding currencies such as the Australian dollar and the pound suffered heavy losses. "Until calm returns to the market, then the era of the carry trade is no more; and even then ... appropriate conditions for its
return are unlikely to be forthcoming for some time to come," said Neil Mellor at the Bank of New York.

• The Bank of Japan meets this week. Markets had been anticipating a rate increase at the August meeting but policy looks set to remain on hold now given the recent financial market turmoil.

Tuesday 14/08/2007 Interbank
GB POUNDS / EURO 1.4778
Pound:

Not the greatest day for the pound yesterday as weaker data and takeover rumours added pressure. Initially slightly weaker PPI data weighed on sterling with quite a sharp sell-off coming on cable and against the euro.
Rumours that Barclays had received official approval for an approach on ABN Amro also pushed sterling lower.

Overnight RICS house prices slowed again with new buyer enquiries falling to the lowest since August 2004.
The interest rate squeeze looks to be well established with rates sitting at a 6-year high.Today we see July’s CPI data which is expected to drop by 0.1% to 2.3% which shouldn’t stop the MPC raising rates to 6% in September.

Euro:

The ECB continued to add liquidity to the market yesterday which kept the euro under pressure. It may be that the ECB sees the euro as strong that they feel they can let the value slide by adding more euros to the money markets.
The timing of the next rate hike has probably not been moved by the recent stock market dip and the euro now has some room to appreciate in value. Plenty of data to digest this morning.

General News:

• The BOJ has now removed all extra liquidity it injected into money markets towards the end of last week. The yen after a strong rally on carry trade reversal looks to be consolidating around these levels.
• NZ Retail sales fell in July causing another dip in the Kiwi dollar.
• The Aussie is trading down again after a fall in business confidence with the cross versus the pound trading towards 2.40.
• Oil is still near lows however after reports of a tropical storm nearing the Gulf coast a bas may be found. Oil is now $71.56.

Monday 13/08/2007 Interbank
GB POUNDS / EURO     1.4777

Pound:

Given the activity elsewhere in global markets the pound seems to have had a fairly quiet day all things said and done. It finished slightly down on the euro and marginally up on cable. The interest rate futures market did begin to question the expected September rate hike given the stock crash however yesterday in the Sunday Times MPC member Sentance, a known hawk, said that all was calm in the BOE and it would reassess the situation on a month by month basis.

Today we have PPI numbers at 0930BST which should give futures markets some basis on whether to price out a September hike for later in the year. This morning cable is comfortable above 2.02 and just under 1.48 on the euro.

Euro:

In addition to Thursday’s cash injection by the ECB more money was added to the market on Friday. The move to Thursday by the ECB looks now to have been a very shrewd strategy given what happened on Friday.
The European interest rate futures market was very liquid on Friday swinging almost a full basis point in some of the further out months. Nothing of note data-wise but interest rate expectations should dominate play today.

General News:

• As mentioned above global stock markets were hammered on Friday as worries about losses related to the sub-prime market caused massive volatility and growth concerns. It is rumoured that the Goldman Sachs Alpha fund has lost 20% in the last month.
• Australian analysts are looking for one more rate hike this year as inflation drifts towards the upper end of the 2-3% target band set by the RBA.
• Oil is still trading near lows with global growth concerns causing expectations of a downturn in demand for crude. Oil is $71.91 this morning.

Wednesday 1/08/2007 Interbank
GB POUNDS / EURO     1.4822

Pound:

This morning sterling is generally down against the majors and up against the minors and exotics. Again we have seen the safety buying of the dollar and Euro which has had a slight negative effect on the pound. Yesterday could be considered a good day but all gains posted on the dollar and Euro have been wiped out this morning.
All eyes are squarely on the MPC rate decision tomorrow as they today sit down and begin to mull over possible outcomes. Today to help the MPC we have plenty of retail data to look at which could be quite heavy on the minds of members given that inflation is now falling.
This morning sterling looks good against the minors and exotics, particularly down in Australia and NZ.

Euro:

Yesterday ECB ‘sources’, which the bank uses to pre-warn markets about moves in quiet periods, yesterday said that the bank is on course to raise rates to 4.25% in September or October. There was a small spike on the rumours but markets had this priced in anyway.
Overnight it was rumoured that Italy may be forced to sell gold and fx reserves to solve the country’s debt.
Euro looks strong this morning on the stock market dip as investors look for a safer currency.

General News:

• Yet again the yen has been the main beneficiary of the volatility in the global stock markets as carry trades reverse and the yen goes bid. GBPJPY is down around 238.
• Aussie, Kiwi and Rand have again been hit on the reverse of the carry trade trading much lower on both sterling and the dollar.
• Oil ground higher yesterday and overnight with the US hurricane season approaching and the news that a tropical storm has formed out in the Atlantic. Oil is now $77.83.