Euro Pounds Currency Brief July 2007

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Pound:

As expected sterling consolidated yesterday and traded fairly range bound on the majors as markets took stock of the equity slump last week and rising credit volatility. The market is in a holding pattern ahead of the MPC decision this week where they are expected to keep rates on hold at 5.75%. The shadow MPC who take a view just prior to the real MPC voted 5-4 in favour of a pause. This does seem close given the previous vote in favour of a hike.
This morning the Guardian reports that a UK think tank said a global credit crunch will severely damage the UK economy. Consumer confidence is expected to fall by a point when figures are released at 1030BST.

Euro:

The Euro looks fairly stable despite worries in the European bond markets. Bond markets were further hit by the collapse of the old Italian 15-year bond.
This week the ECB should leave rates unchanged at 4% with a rate hike expected and now priced in for September.
Again plenty to digest in terms of data over the course of the morning. This morning should be volatile.

General News:

• The yen continues to look strong today following the recent rally. Overnight data showed that Japanese unemployment fell to a 9-year low of 3.7% suggesting that tighter job conditions should push prices, as predicted by the BoJ.
• Aussie data overnight gave a firm bid to the dollar stemming recent losses. This time a business condition index rose 3 points to 20.
• Oil continues to trade near the highs on market uncertainties. An OPEC spokesman last night said that prices currently have a $7 premium on security risks. Oils is now $76.64.
 

Pound:

The pound has come under pressure from some of the majors in the past 36 trading hours as the hawkish
sentiment towards the UK has wavered slightly. A report on Friday by NIESR said that the MPC had to be
wary of overkill in it’s approach to curbing inflation at the expense of growth and consumption.
Also in The Sunday Times yesterday David Smith reiterated his view that the MPC have done enough in raising
rates to knock inflation on the head. Also the BCC this morning have warned of the consequences of a
rate rise this week in the wake of the recent widespread flooding across the UK. The Hometrack house price
survey released overnight provide further evidence that the UK housing market is cooling after higher interest
rates. Data this morning from Home track showed that house price growth had slowed to 18-month lows.
M4 money supply will be closely watched today when released at 0930BST.

Euro:

Not much to report from the Euro other than the underlying strength being further backed by the risk aversion
and flight to safety from the riskier investments across the globe.
Again not much on the data front but it will be worth keeping an eye on the newswires for any ECB hints of

General News:

• The yen rallied and kept on rallying on Friday as the previously mentioned carry trade unwind kept the
currency on a rally. This was always a danger and it was a matter of time before the move happened.
• On the back of the above the other side of the carry trade suffered, in particular the Aussie, the Kiwi
and the South African Rand. Just to highlight the severity of the move between the crosses, the JPYAUD
cross has lost 7% since last week.
• Oil drifted away from the highs of last week as global stock markets fell and the US dollar rallied upping
the purchasing power of OPEC. Oil is now $76.63.

Pound:

Sterling has come under some downward pressure, falling against the dollar and Euro in the wake of weaker
than expected housing data. It has also out in the carry-trade sell-off. (this is where investors borrow lowyielding
currencies and lend high yielding ones) The Nationwide house price survey for July showed prices up
just 0.1% on the month, with the y-on-y rate falling to 9.9% from 11.1% in the previous month. There was
also evidence from the banking sector that the demand for mortgage lending is falling as higher interest rates
bite. Markets are still pricing in one more rate hike but are now less convinced that the BoE will end to go
beyond the 6.0% level. The effects of rapid interest rate rises in the last year must surely be starting to hurt.

Euro:

We expect the ECB to hike rates by another 0.25% to 4.25% in September/October. This may well approximate
a neutral policy stance. However, if the eurozone economy continues performing well, the ECB may decide
that it needs to move policy to a slightly restrictive stance, given the upside risks to inflation. Thus, we
look for ECB rates to rise to 4.5% early next year. The Euro has strengthened today against the pound by 3/4
of on cent back into mid 1.48’s at interbank.

General News:

• German business confidence slipped in July, with the higher interest rate environment and stronger
exchange rates impacting.
• All 61 economists polled by Reuters yesterday said they expected rates to stay on hold. But a majority
also expect a rise, to 6 per cent, in the coming months.
• The Bank of England will risk overkill in its campaign to curb inflation if it orders further increases in
interest rates, Britain's leading economic think-tank will warn today.
 

Pound:
Not much from the UK market yesterday despite a very poor day against the dollar. MPC uber-hawk Tomothy Besley spoke yesterday of increasing pressures in the economy to inflation. He also said that his tag of ‘uberhawk’ is somewhat vindicated considering recent economic data. He did mention consumption slowing towards the end of 07, start of 08.
Elsewhere Nationwide House Price gains fell to a 15 month low as homebuyers think twice about overleveraging to buy that bigger house. All signs are pointing to a much needed respite in the runaway housing market.
Nothing of note to report on the data front today, nor are we expecting MPC members to speak.

Euro:
A poor day for the euro yesterday with heavy pressure coming from all angles, particularly against the rallying US dollar. There was nothing on the data front to help the euro yesterday either.
Euro-dollar traded down sharply after breaking through the 1.38 level and also lost ground against the pound trading to a high of 1.4967.
Today we have German IFO data which is always volatile and the figure is due to be lower than previous.

General News:
• The RBNZ overnight raised interest rates to a massive 8.25% following on the back of increasing inflation and consumer spending in New Zealand. The currency however fell following the announcement as chief Bollard said recent rises will be ‘sufficient to contain inflation’.
• Another good day for the yen despite heavy pressure from the States. Dollar yen remains around the 120 level and sterling yen is around 247.
• Oil spiked massively yesterday after US inventory data showed that crude stocks dropped to levels previously seen in 2006. Oil is now $76.09.
 

Pound:
A strong start for sterling this morning with seemingly no fundamental reason for the move. There has been some quite heavy flow from Asia which would point to carry trade activity based on rising UK yields. This morning stops were triggered on cable above 2.0605 which pushed the cross to a high of 2.0655 before dipping lower. This buying over the dollar also helped the pound to push higher against other crosses with sterling-euro trading over 1.49.
In the UK today we have CBI Industrial Trends due at 1100BST which is expected to dip from last time out. At 1230 BST the MPC’s Gieve is to speak which should keep the market on its toes. Again analysts will be looking for any clues as to the timing of the next UK rate hike, if indeed there is one to come.

Euro:
Yesterday and overnight comments from the ECB’s Stark helped to allay investors fears over the path on interest rates. Stark commented that if Trichet says there are no reasons to change market expectations then that in itself means a great deal. Currently the Euribor futures have at least one more move priced fully in before December of this year. Stark also said that the strong euro as yet, has not hit exporters. ECB’s Papademos is to speak today and the data of choice is the PMI data from the Eurozone.

General News:
• A Chinese think-tank said that China needs to raise interest rates to reduce the risk of liquidity-fuelled asset bubbles.
• The Japanese Finance Minister said that the recent earthquake will only temporarily affect production.
• Oil dipped again yesterday following OPEC’s comments that it would increase production if the need arose. It is worth noting that the falling US dollar is reducing OPEC’s purchasing power by a third which would see OPEC more reluctant to increase production or cut prices. Oil is now $74.64.
 

Pound:
The pound has had a strong start in London trading this morning following fairly bullish/hawkish press comments at the weekend. The Sunday Times reported on Ernst & Young’s Item Club saying that one more hike to 6% should do enough to bring inflation back to 2%.
Meanwhile the Mail on Sunday said that it is difficult to put a cap on rates and that rates are to go way above 6%. Elsewhere Rightmove House Prices were slightly down against expectations data showed overnight. The housing market seems to be feeling the squeeze however it is interesting to note that London prices are still going strongly. Nothing in the way of data from the UK and no MPC members are due to speak. This morning cable is looking strong trading around 2.06 and against the euro sterling is up near 1.49.

Euro:
Not a spectacular performance from the Eurozone however the underlying strength remains firmly planted in the market.
A report in a German Sunday newspaper said that unemployment looks set to drop below 3.5 million people.
This morning the euro has started strongly ahead of German data due late on this evening and ECB member Stark is set to speak at 0800BST.

General News:
• The Australian dollar is trading near 33-year highs as commodities rally and a near capacity economy push the dollar higher. With rates at 6.25% and a near capacity economy threatening to push inflation higher, the RBA may have to keep the hawkish stance.
• The South African Rand rallied as global commodities staged somewhat of a comeback on the back of the recent oil rally.
• US traded away from recent highs as OPEC said it was concerned about the potential impact of high oil prices on the global economy. Also OPEC President Al-Hamli said that OPEC is prepared to pump more oil if needed. Oil stands at $75.56.

Pound:
With the UK Retail Sales coming in at a four month low & June Mortgage Lending at £4.7 bln compared to the same month last year at £6 bln the Sterling deposit market has eased back from the knee-jerk levels seen post CPI/RPI earlier in the week.

What worries me is that we have had 5 official rate increases in the last 12 months and some of that is still to filter through to the general economy and the market still expects another increase in the Bank Rate to 6%. Couple that with the extra tightening in policy due the strength of the Pound then the MPC hawks had better beware because when the economy eventually slows it might slow TOO much.

Sterling for now it seems remains strong.

Euro:
There are no US or eurozone data of note today but the ECB’s Trichet is due to speak at 9.00 this morning.
Markets will be looking to see if he has anything new to offer in terms of the outlook for monetary policy, particularly given that the Governing Council would have met yesterday for its “non-policy” meeting.

General Currency News:
High yielders remained in favour with the NZD hitting fresh 22 year highs versus the dollar and a 21
year high against the yen.
Sentiment remains against the dollar going into the weekend.
There were also no surprises in Bernanke’s repeated testimony to congress, though the dollar did get a bit of a lift versus the yen when he remarked that the Fed did not see any need for any policy changes by the Bank of Japan with regard to its currency.
 

Very little to report from the Eurozone yesterday or today with no significant data released and the Euro sitting quietly waiting for some direction. Euro-dollar is still trading just above and just below 1.38 as the dollar fluctuates and is comfortable in its range against the pound.
The ECB Governors meet today so there is a chance of some comments released to the market so all eyes will be on news feeds for any out of the blue statements.

General Currency News:
• Chinese GDP rose 11.9% in the 2nd Quarter data showed overnight and in addition CPI rose by 4.4%
which will put further pressure on China to tighten in the coming fortnight.

• NZ Finance Minister Cullen said overnight that the government will not rule out using their power to
suspend the policy agreement with the RBNZ but that he has confidence in Governor Bollard.

• US gasoline stocks fell yesterday pushing oil prices up near 11-month highs. The IEA also said that the
recent inaction by OPEC will boost oil prices. Oil is $75.28.

• The Telegraph this morning is warning that £1/litre petrol prices are ‘almost a certainty’.