Despite an ISM manufacturing figure that was the worst in 26 years USD strengthened significantly against GBP and EUR yesterday. The figure however did not affect commodity currencies as it previously could have. I think that volatility is starting to fall as riskier asset investment is buoyed by a return of positive investment sentiment. There may be some credence as well in the belief that volatility is falling because speculators are waiting for the dust to settle from the upcoming central banks’ rate decisions.

The RBA cut rates by 0.75% overnight in a move that will strengthen low yielders further. As my colleague Rick pointed out in the weekly update last week, global interest rate cuts could bring about the death of the carry trade as a viable investment idea. The central bank said the rate reduction was necessary because of financial-market turmoil and weaker-than-expected consumer spending.

The US election kicks off today however we see little possibility of any surprise. We believe Obama/Biden will emerge victorious with a significant lead in the popular vote and the Electoral College and the Democratic Party should make sizeable gains in Senate and House races. This result has been priced in already.

An announcement from the EU yesterday told us all what we already knew: the European economy probably entered a recession last year and will stagnate in ‘09. We foresee further weakening of the single currency against the USD in the short term; whether GBP will be able to capitalise remains to be seen and its hopes may be dented by today’s PMI release which is expected at yet another record low.

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

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