The Bank of England and the European Central Bank left their respective base rates
on hold at 5.75% and 4.00%. These outcomes were expected and therefore the
reactions muted. As usual the BoE MPC did not release a statement. However the
ECB President did address the press and participated in a questions and answers
session. Trichet had to choose his words carefully and remained calm under
pressure, as too much emphasise in either direction could cause substantial
reactions for the euro. The recent euro strength has drawn out comments of
discontent from some of Europe’s leaders, who feel current conditions are impacting
negatively on their economies. The ECB did however reiterate that they were
committed to keeping inflation in check and would continue to take steps to ensure
inflationary expectations remained low.
The Fed chairman, Ben Bernanke, testified last week and as expected his comments
were largely consistent with the FOMC’s October statement. He did however
downsize his growth predictions claiming growth “would slow noticeably in the fourth
quarter”. Essentially his testimony warned of possible continued tightening in credit
markets and further risks from weaker housing prices. This put dollar under new
pressure mid week, with a rally to 2.1150 in GBPUSD.
These Cable highs proved to be short lived with the resurgence of credit market
concerns and the subsequent sell-off in any higher risk assets. Equity markets
tumbled along with commodity and the high-yield basket. NZD, CAD, AUD, ZAR, and
GBP all fell as traders scrambled for safe haven currencies and sold back out of their
carry trades. JPY and CHF got the largest gains in a reversal that saw GBPUSD lose
more than 2.5%.
The week ahead
• The key event this week will be the Bank of England Inflation report. There is
a good chance the MPC will lower their growth forecasts and publish inflation
predictions inline with a Bank cut in the foreseeable future. Some sectors
have already criticised the bank for not loosening already and we expect the
report to hint at a rate cut for early next year.
• UK CPI should have remained under the BoE target of 2.0%, but might have
edged up slightly to 1.9% from 1.8% previous.
• Retail data will be significant from the US. Recent tightening of credit
conditions has seen many US sectors slow and the market will be interested
to know if the Fed’s attempted jump start, in the form of interest rate cuts, has
had any effect.
0207 801 9084
Currency Rates Low High Current
GBPEUR 1.4232 1.4417 1.4166
As expected the ECB held rates last week at 4%. Trichet’s follow up press
conference was very cagey and with no mentions of monetary vigilance, inflation
should be seen to fall in the New Year in the Euro zone. Increases in German
industrial production were offset somewhat by a fall in orders and retail sales figures
dipping to 1.6% from 2.2%. Euro strength as previously reported has brought about
consternation with the Germans, French and Italians protesting due to the export
good drop off unions are complaining about in their respective countries. However
with credit crunch fears re-emerging EURUSD should retrace from the highs.
GBPUSD “Cable” 2.0781 2.1161 2.0685
The dollar has continued to weaken over the past week, once again breaking and
remaking 26 year highs. Strange times bring about strange news flow as everybody
from the Chinese government to Jay-Z, the rapper, expressed desires to diversify
away from the USD towards the Euro. Fundamental data, although dollar positive,
has not been able to halt the slide; PMI was recorded at 55.8 against an expectation
of 54.8. Dollar did make some of its losses back on Friday however as technical
resistance and rumours of credit crunch pressures on British financial institutions
weighed on sterling.
Commodity currencies Low High Current
A slight unwinding of the carry trade has seen commodity currencies come under
pressure in the past week.
GBPAUD 2.2305 2.3172 2.3226
Carry trade problems and movements away from risky assets has brought Aussie
back from the all time highs against the USD we’ve seen in previous weeks. As with
the other Central Banks, the RBA decided to act with the consensus and raised rates
by 0.25% to 6.75%, the fillip seen on yield value will do well however to maintain in
the face of substantial risk aversion environmental pressures.
GBPNZD 2.65045 2.7445 2.7346
Unemployment figures dealt kiwi a hefty blow last week as figures showed 0.3
decrease as supposed to the expected 0.4 increase. This combined with weakness
in the equity markets and a general move away from riskier assets may hurt kiwi in
the short term.
GBPCAD 1.9011 1.9802 1.9870
The Canadian government voiced greater concern over the currency with Prime
Minister Harper stating that the rapid gains required a period of reflection over
exchange rate policy. The Bank of Canada also voiced concerns that the currency
had appreciated so fast over the past few weeks. With carry trade unwinding a strong
possibility of a move to parity may be not far off.
Low High Current
GBPZAR 13.475 13.9247 14.05
Following a fairly hawkish review of the economy earlier last week another rise in
interest rates seems to be on the cards for December by the MPC. Rand was hurt a
smidge by a fall in manufacturing output due to an earlier 3 week strike although this
is not believed to signal any cooling of inflationary pressures.
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 (firstname.lastname@example.org)
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
Please reply with REMOVE in the subject of your e-mail if you would like to be
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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 13 November
UK 00:01 RICS house price balance Oct -14.6 -19
UK 09:30 CPI, % M/M Oct 0.1 (1.8 Y/Y) 0.3 (1.9 Y/Y)
UK 09:30 RPI, % M/M Oct 0.3 (3.9 Y/Y) 0.4 (4.2 Y/Y)
Germany ZEW economic expectations
Nov -18.1 -20
E13 10:00 Industrial production, % M/M Sep 1.2 (4.4 Y/Y wda) -0.2 (4.5 Y/Y wda)
Wednesday 14 November
UK 10.3 BoE Inflation
E13 07:00 New car registrations, % Y/Y
Oct -4.1 …
Germany Final HICP, % M/M Oct 0.2 (2.7 Y/Y) P 0.2 (2.7
Germany Final CPI, % M/M Oct 0.2 (2.4 Y/Y) P 0.2 (2.4
Germany Preliminary GDP,% Q/Q Q3 0.3 (2.5 Y/Y) 0.7 (2.5
UK 09:30 Whole economy average
earnings, % 3m/y
Sep 3.7 4.0
UK 09:30 Core average earnings, %
Sep 3.7 3.8
UK 09:30 Claimant count
unemployment, change k
Oct -12.8 -6.0
E13 10:00 “Flash” GDP, % Q/Q Q3 0.3 (2.5 Y/Y) 0.6 (2.5 Y/Y)
US 13:30 PPI, % M/M Oct 1.1 (4.4 Y/Y) 0.3 (6.3 Y/Y)
US 13:30 Core PPI, % M/M Oct 0.1 (2.0 Y/Y) 0.2 (2.6 Y/Y)
US 13:30 Retail sales, % M/M Oct 0.6 (5.0 Y/Y) 0.2 (5.3 Y/Y)
US 13:30 Retail sales ex autos, %
Oct 0.4 (5.1 Y/Y) 0.3 (5.9 Y/Y)
US 15:00 Business inventories, %
Sep 0.3 (3.2 Y/Y) 0.3 (3.1 Y/Y)
NZ 21:45 Retail sales, % M/M Sep 0.2 0.5
Japan 23:50 Tertiary Industry Index, %
Sep 1.3 -1.0
Sweden 08:30 Unemployment rate, % (nsa) Oct 4.2 …
Norway 09:00 Trade balance, NOK bn Oct 29.2 30.5
UK 09:30 Retail sales, % M/M Oct 0.6 (6.3 Y/Y) 0.1 (4.8
E13 10:00 HICP, % M/M Oct 0.4 (2.1 Y/Y) 0.5 (2.6
E13 10:00 HICP ex tobacco, index (2005 = 100) Oct 104.59 (2.06 Y/Y) …
E13 10:00 “Eurostat” core (HICP x fd, alc, tob, ene),
Oct 0.3 (1.8 Y/Y) 1.9
E13 10:00 “ECB” core (HICP x unproc.fd, ene), %
Oct 0.4 (2.0 Y/Y) 0.3 (1.9
E13 10:00 BarCap underlying, % Y/Y Oct 1.95 …
Canada 13:30 Manufacturing shipments, %M/M Sep -1.7 -0.4
US 13:30 CPI, % M/M Oct 0.3 (2.8 Y/Y) 0.3 (3.5
US 13:30 Core CPI, % M/M Oct 0.2 (2.1 Y/Y) 0.2 (2.2
US 13:30 NSA CPI, index Oct 208.490 208.871
US 13:30 Empire manufacturing index Nov 28.8 20.0
US 13:30 Initial jobless claims, thous (4wk mvg
20 Nov 317 (330) 320
US 17:00 Philadelphia Fed index Nov 6.8 5.0
Swi 08:15 Adjusted real retail sales, % Y/Y Sep 3.8 …
E13 10:00 Trade balance, ¤ bn (sa) Sep 4.3 3.0
US 14:00 Net foreign security purchases (TICs), $
Sep -69.3 80.0
US 14:15 Industrial production, % M/M Oct 0.1 (1.9 Y/Y) 0.1 (2.2
US 14:15 Manufacturing production, % M/M Oct 0.1 (1.6 Y/Y) …
US 14:15 Capacity utilisation, % Oct 82.1 82.0
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.