King to get his stationery ready

Last week was once again a poor one for sterling; hammered by the dollar and unable to capitalise on the weakening euro, the pound is most definitely in the doldrums. 

New inflation and price pressures seem to popping up everyday and were typified by last week’s producer price numbers. Input producer prices rose by 3.8% in the month of May, not really a surprise given the increase in oil prices and this translates to give an annual increase of 27.9%, the highest reading in 20 years. Core output prices also touched similar record levels.

Bargain hunters are reported to be swooping in on foreclosed property in the US as the bottom is said to have past; there is however no such luck in the UK. Any positive sentiment that flows towards sterling is almost instantly sucked away by detrimental housing figures. The Royal Institute of Chartered Surveyors reported activity falling to a 30 year low however the headline figure was up from last month’s record low. This was unable to shove sterling higher. Homeowners could also further feel the pinch as further anti-inflationary rate moves will strangle the housing market further.

We will gain a glimmer of whether further rate movements have been discussed in the corridors of power as this week sees the minutes from June’s rate decision released. Analysts expect an 8-1 split with the perennial dove of member Blanchflower seen as the dissenter. Sterling could be afforded some breathing room should we see one of the more hawkish members, Besley or Sentance for example, come out in favour of a pre-emptive hike. King is also known to be hawkish in these circumstances but will we see his anti-inflationary colours come to the fore? We’ll see on Wednesday. 

The main piece of data this week for the UK however will be Tuesday’s CPI release as it is forecast to break the key 3% barrier. Mervyn King will have to locate the mail room for the first time since 16th April 07 and send a letter to Chancellor Darling explaining the reason for the BOE missing target by so much. It is no coincidence that in his previous explanatory letter he blamed an increase of 25% in the price of petrol as the main cause for high reading; expect more of the same.  

The week ahead

The housing market is the main focus of the US data this week with today’s NAHB housing index and tomorrow’s Housing Starts release set to show that the worst may not be over. Tomorrow’s PPI data will also be closely watched as the US inflation picture becomes even more significant. Forecasted data predicts a bad week for euro as the German ZEW sentiment index is predicted to forecast a fall as inflation concerns begin to weigh. Trichet is also due to speak this week with the typical concerns still alive to market participants. 

Currency Rates                  Low                High               Current 

GBPEUR                                1.2578             1.2705             1.2698
 
Politics hurt the euro last week. Complaints from Mediterranean Europe, Spain and Portugal in particular, over the pressures their economies are under due to centralised decision making combined with the negative referendum over the Lisbon Treaty in Ireland hurt the single currency but failed to break it the cross out of its recent trading doldrums. 

Strength in the early part of the week was primarily due to hawkish statements from committee members in public comments. Suggestions of rate hikes were bandied around however ECB member Stark hinted that there would only be one hike in the near term.

Data was not really a factor for the euro last week as only an increased industrial production number was released at better than consensus.

In the near term we expect GBP/EUR to continue to trade between 1.24 and 1.28.  

GBPUSD “Cable”                 1.9408              1.9800            1.9668
 
Dollar saw its biggest gain against sterling in 3 months last week as data and comment hinted at a rebound in the fortunes of the economy stateside.

The majority of the dollar’s strength was to be found in comments from decision makers across the pond. Fed Chairman Bernanke opened the batting with a strong swipe at people advocating a ‘wait and see’ policy. Bernanke stated that economic risks had lessened somewhat and the market took that as a potential cap tip towards a tightening interest policy being created. The greenback also benefited as Treasury Secretary Henry Paulson alluded to a possible intervention to shore up the dollar through these difficult times.

But this wasn’t just a case of ‘all talk and no trousers’ as data also allowed dollar holders to smile. Retail sales jumped a full 1.0% as the effects of tax rebates earlier this year enabled spending to increase; home sales also increased as bargain hunters are said to be circling over foreclosed properties. 

Commodity currencies      Low                High               Current

GBPAUD                                2.0164             2.0731             2.0882
 
The Australian economy took a couple of unexpected blows this past week with results not as shiny as forecasted.  According to the Melbourne Institute, consumers are becoming convinced that high inflation is here to stay, leading on from Inflation Expectations of consumers rising from 5.2% last month to 5.9% in June.

Housing finance approval loan numbers for owner occupation fell 3.0%, a touch softer than expectations.  The third decline in the past four months and back to the lowest levels of total approvals since November 2006.  

After a continuous 18 month run of employment growth (last fall being in October 06) there was an unexpected surprise; employment falling by twenty thousand in May.  Up until May, employment growth had been averaging 25k per month in 2008. The slowing in employment growth is consistent with the slower growth in economic activity seen in recent quarters.  This result is more evidence for the RBA to keep interest rates on hold.
 
 
GBPNZD                                2.5570             2.6102             2.6084

The NZD was one of the worst performing currencies last week, falling 1.8% against the US Dollar and nearly 3% against the AUD.  As history tells us, the NZD does not stay high in a weak growth environment and with the current economy the headwinds for the NZD are likely to intensify.  Particularly as there is potential for the March quarter GDP (due at the end of June) to be negative and June quarter GDP is shaping as no better.   After the RBNZ’s change in stance and its acknowledgment that the economy is slowing sharply and is to remain subdued for some time the NZD was seen last week to pre-empt an interest rate easing cycle. 

Keeping the NZD afloat last week was the stronger than expected merchandise terms of trade results released last Wednesday, which has continued its impressive rise over the March quarter and is the highest since the first quarter of 1974.  However, it was reported last week, that construction activity contracted over the March quarter.  An early Easter would have exaggerated the decline, but building consents data point to further declines in residential construction activity ahead.  Weaker than expected retail sales data were released on Friday, with Retail Sales (MoM, ex-auto) down 0.5% versus 0.2% expected.  

All this being said and done if the NZD is to depreciate further in value the market will need to see the RBNZ’s intention of creating a cycle of interest rate cuts rather than just one.   In reality the RBNZ may not be able to lower interest rates as quickly as has been suggested, given their lack of inflation headroom.

GBPCAD                                1.9148             2.0249             2.0166
The Bank of Canada surprised the market last week in its rate decision; a hold as supposed to the consensus view of a 25bps cut. The Bank cited increased inflationary risks which have emerged over the past few weeks alongside the feeling that fears to growth prospects have been allayed somewhat.

This saw CAD strengthen against the USD albeit briefly as oil prices went against the loonie. 

GBPZAR                                 15.3704          15.8987            15.8837

The market was braced for a 100/200bps hike by the SARB last week and despite an extremely hawkish statement from the MPC a 50bps hike was the decision. The inflation outlook has decreased markedly in previous weeks with CPIX now forecast to hit 12% in Q3 of this year.

Electricity supply problems have also hampered growth in South Africa. GDP on a quarter by quarter basis fell to 2.1% vs. 5.3% as the mining sector took the brunt of the cuts, cutting production by 22%.