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
0207 801 9084
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
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
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,
(http://news.bbc.co.uk/1/hi/business/7078251.stm), 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 (email@example.com)
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
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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
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%
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%
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
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.