The Federal Reserve Bank cut their base rate as expected to 4.50% but this had

already been priced in, therefore we saw little reaction to the news. The market

waited with bated breath for Friday’s US Non-Farm Payroll figures. Recent data had

been negative for the dollar and most traders remained bearish USD as Friday

inched closer. The payrolls figure is one of the most important figures on the monthly

calendar and gives a reflection of the US employment situation. Obviously, with the

recent economic downturn the market was expecting a fall in payroll levels, 88k from

110k the month before.

The release surprised the majority and rose to 166k, almost double expectation.

However, the reaction to the new was almost more important than the data itself.

After the initial dollar spike, due to the upward surprise, it began selling-off again. By

the close of business in London, Cable had risen to 2.0890 and sent a clear signal

that the market is content to ride the dollar wave lower. Friday’s reaction may signal

that traders are looking for levels of 2.10 before a significant reversal in the GBPUSD


Sterling had a slight change in sentiment last week. Hawkish comments from

Monetary Policy Committee (MPC) members, Barker and Bean, ahead of this week’s

monetary policy meeting, meant sterling was supported for most of the week. Other

news also contributed to sterling’s lift. Nationwide house prices bucked the recent

downward trend, showing the highest growth in four months and consumer

confidence was on expectation. The pound edged up against the euro and reached

new highs versus the dollar.

This week turns to monetary policy, with the European Central Bank and the Bank of

England both due to announce their respective decisions. Neither bank is expected

to change from their current levels of 4.00% and 5.75% respectively.

The week ahead

Bank of England MPC rate announcement, “no change” to 5.75% is expected

European Central Bank rate announcement and press conference. Trichet’s

comments are likely to be slightly hawkish. However, if he chooses to discuss

the current high euro level. We may see the common currency lose a little


UK housing and retail data are due out this week. Both should reflect a small


Economic Research

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Currency Rates Low High Current

GBPEUR 1.4242 1.4450 1.4378

The ECB are at stuck at a classic macroeconomic impasse. As we all know, Euro

has been historically strong against the US dollar over the past few weeks and is also

trading in a tight band against sterling. The problem is that they are receiving political

pressure to weaken the euro however fundamental data shows that a hike in rates

may be needed due to inflationary movements. This was particularly evident after the

provisional consumer inflation rate figure jumped from 2.6% to 2.1%. The euro will

remain susceptible to profit taking, correlated strongly with days in which global

equity markets take a beating.

GBPUSD “Cable” 2.0527 2.0897 2.0795

Cable continues to defy expectations as continual 26 year highs were broken almost

on an hourly basis. The Fed cut rates on Wednesday by 25bp, a move although

expected prompted further weakening of the greenback, so much so in fact that US

Treasury Secretary Paulson was forced to declare that the US is committed to a

strong dollar. The remarkable nature of cable was put into perspective on Friday as

US Non-farm payrolls data was released. The amount of new jobs created was

double estimates, a strong dollar positive signal, however once the dust had settled

we remained close to intraday highs. Rumours of emerging market currencies

dropping their pegs fell on deaf ears although this does remain as a substantial

downside risk.

Commodity currencies Low High Current

Given the weakening of the dollar, commodity currencies have managed to hold on

to recent gains.

GBPAUD 2.2181 2.2823 2.2620

Aussie hit further highs last week off the back of the Fed rate cut and will be due to

strengthen against sterling this week as the overwhelming majority of analysts

believe the RBA will hike rates to 6.75%. Retail sales figures were up 0.8% as the

Australian economy continues its bullish stance.

GBPNZD 2.65605 2.74425 2.7101

Much like Aussie, Kiwi dollar has been at the behest of carry trade risk aversion

pressures and the Fed rate cut. Without much substantive data last week and only

the Unemployment rate of note in the coming days NZD could be liable to some

volatile trading.

GBPCAD 1.9414 1.9834 1.9427

Canadian dollar has hit all time high levels since its free float in the early 70’s.

Benefiting from the resurgence of crude oil prices has brought volatility to the loonie

and deflationary pressures due to producer price falls may force Gov. Dodge and the

rest of the Bank of Canada decision makers to intervene.

Low High Current

GBPZAR 13.784 13.784 13.68

Rand retraced somewhat from the record highs it enjoyed in previous weeks. PMI

figures came out at the top end of expectations and will assuage fears of a violent

economic slowdown. If risk aversion sentiment emerges again over the next week

due to current US banking sector concerns,

(, Rand may weaken back towards



Please see GBPEUR comments above. EURCYP is pegged in preparation for Euro

entry and so GBPCYP moves proportionally with GBPEUR. [Update: The Cypriot

government has allowed the currency to strengthen very slightly to 0.573 against

EUR, in light of market pressure. The pair is now stable here.]

Produced by Jabu Henson and Jeremy Cook (

Please feel free to contact me at anytime regarding these briefings, if you have any

questions or thoughts on them, or if you are interested in a particular event in the


Please call us on 0800 001 5055 if you have any questions or would like to discuss

the markets.

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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 authors own judgement as of the date of the

briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not

indicative of rates offered by World First for smaller amounts.

This week’s data Previous Expected

Tuesday 6th

UK: 00.01 BRC Retail Sales Survey (October) (+3.0%)

UK: 00.01 NIESR GDP Estimate +0.7%

JPN: 05.00 Leading Indicators (September) 27.3

EU-13: 09.00 Services PMI (October) 54.2 / 55.6 (p) 55.6

EU-13: 10.00 PPI (September) (+1.7%) (+2.6%)

EU-13: 10.00 Retail Sales (September) (+1.0%) (+2.0%)

GER: 11.00 Industrial Orders (September) +1.2% -0.2%

AUS: 23.30 RBA Rate Announcement 6.50% 6.75%

Wed 7th

GER: 11.00 Industrial Production (September) +1.7% -0.3%

US: 13.30 Labour Costs (Q3) +1.4% +1.1%

Productivity +2.6% +3.0%

US: 15.00 Wholesale Inventories (September) +0.1% +0.2%

US: 20.00 Consumer Credit (September) $12.18bn +$8.0bn

JPN: 22.50 Money Supply (October) (+1.7%) (+1.7%)

JPN: 23.50 Core Machinery Orders (September) -7.7% -1.5%

Thurs 8th

JPN: 05.00 Economy Watchers Index (October) 42.9

GER: 07.00 Trade Balance (September) €15.3bn €16.0bn

UK: 12.00 BoE Rate Announcement 5.75% 5.75%

EU-13: 12.45 ECB Rate Announcement 4.0% 4.0%

EU-13: 13.30 ECB Press Conference

US: 13.30 Initial Jobless Claims (w/e 3rd November) 327,000 330,000

Fri 9th

FRA: 07.45 Industrial Production (September) +0.3% -0.5%

ITL: 09.00 Industrial Production (September) +1.3% (+3.0%) -0.5%

UK: 09.30 Trade Balance (September) -£6.853bn -£6.9bn

– Non EU Trade -£3.902bn -£3.9bn

US: 13.30 Export Prices (October) +0.3% +0.1%

– Import Prices +1.0% +1.0%

US: 13.30 International Trade Balance (September) -$57.59bn -$58.5bn

US: 15.00 Michigan Sentiment (November Prelim) 80.9 79.8


Bull/Bullish: one who thinks a market, currency or asset will appreciate

Bear/Bearish: one who thinks a market, currency or asset will depreciate

Pip: the fifth significant figure of a currency price: 1.2345

Big figure: the third significant figure of a currency price: 1.2345

Basis point: a 0.01% unit

Tightening (Interest Rates): raising interest rates (loosening is opposite)

Hawkish: comments that suggest interest rate tightening i.e. moving higher

Dovish: comments that suggest interest rate loosening i.e. moving lower

MPC: Monetary Policy Committee, the body that sets UK interest rates

ECB: European Central Bank, the body that sets the Eurozone interest rate

RBA: Reserve Bank of Australia: the central bank of Australia.

Cross-Currency Pair Flow: Where a set of three interlinked rates, e.g. GBPEUR, EURUSD and

GBPUSD, move as any combination of two of these rates must produce the third in order to satisfy a

condition known as No Arbitrage. If there are movements in two markets, then the third must move

deterministically. Also knows as triangulation.

Carry Trade: Simply put, is the borrowing of money in a low interest economy (Japan) and investing it in

a higher yield economy (Australia). This yields a certain profit unless the interest rate differential

narrows, or the exchange rate moves such that it costs more to buy the currency back.

Fair Value- Also called financial fair value: A measure of the theoretical exchange rate using certain

Macroeconomic models (such as eCIP).

Underlying Inflation: A somewhat academic measure of long-term inflation- removing all the’

interesting’ elements like energy and luxury consumption leaving the ‘boring’ elements like utility bills

and food. [Quotes from BoE governor Mervyn King]

Interest Rate Traction: Although there is a group of people who announce an interest rate, it has to feed

through the economy through some very complex and poorly understood channels. Once rate hikes are

having an effect on inflation and long term yields it is said that they are finding traction with the


Unemployment rate: The percentage of people who are able and ‘willing’ to work (ie in the labour

force) who are not employed.

Participation rate: The percentage of the population of working age in the labour force.