Euro Pounds Brief Friday 26th January 2007

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Friday 26/01/2007

• Carry trades dominate the market
• Sterling spikes on growth
• Japan posts gains after carry trade unwinds; inflation low
• Fed still wary on inflation and ‘overheated’ economy
• Kiwi consolidates following rally
• Oil stabilises following an action-packed week

US Dollar:

Another unstable session over the Pond following disappointing home sale numbers and an even worse
bond auction; this on top of a dreadful session in the US stock markets. The Dow Jones closed 119
points yesterday as investors decided to take their profits after a two-day rally. More housing data is
due out this afternoon; with data driving market fundamentals another volatile session is in store.
Interestingly the US have commissioned a stud into the leveraged derivatives market after US hedge
and private equity funds boom globally. Fears are a market correction could cause serious problems.

Pound:

A quiet day in the sterling market as traders take stock of a mixed-news week; Mervyn King added yet
more uncertainty to an already jittery market at the Chamber of Commerce in Birmingham following
the MPC rate rise. King seemed to signal a cap in the recent interest rate cycle noting that the inflation
rate may drop sharply in the latter half of 2007. Mortgage figures are due at 0930 this morning; more
bullish data is expected with the City pay rounds forcing house prices higher.

Euro:

Despite continuing ECB comments the euro failed to gain ground on the major crosses. Following Japanese
news (see below) the euro was heavily sold receding from all-time highs in Asia. ECB’s Stark commented
on the inflation risks posed by low credit costs across Europe.
German data again disappointed this morning with the VAT hike really biting into consumers’ pockets.

General News:

• The Kiwi dollar lost ground as Asia suffered this morning; after the RBNZ comments yesterday
the markets took stock of soaring NZ interest rates.
• The yen rallied in late trade as officials warned that the carry trade trend is undervaluing the
currency. Unwinding may have a huge effect on global markets as funds have been selling the
yen in huge volumes to invest in high-yield currencies. Inflation data capped gains as the headline
figure dropped, silencing calls for a February rate hike.
• Oil dropped a touch with traders locking in profits following the rallies seen this week. The US
hinted that stocks will be increased due to supply uncertainties pushing oil away from the $50
level. Current trade is seen at $54.85.

Interbank
Updated 25th January
GB POUNDS /US DOLLAR 1.9622
GB POUND / EURO 1.5197
EUR/USD 1.2910
GBP/JPY 238.43
GBP/AUD 2.5375
GBP/NZD 2.8163
GBP/ZAR 14.2729
GBP/CHF 2.4541
GBP/CAD 2.3210
GBP/SGD 3.0188
GBP/THB 64.728
GBP/HKD 15.3195