The pressure remained firmly on the shoulders of the pound last week but the UK
currency staged a valiant fight back. The housing market is of particular concern and
there can be no doubt activity is slowing. The Nationwide house price index fell 0.8%
in November with the majority looking for +0.1%. Mortgage approvals also
disappointed at 88k versus 100k previously. This represented the lowest level since
February 2005. These figures will be particularly worrying for the Bank of England
going into this week’s monetary policy meeting. The credit crunch has had a
dampening effect on business, and the slowing in the housing market will mean the
pinch will be felt by households soon. In recent years, the strength of house prices
has acted like a shield. Under which, consumers had a sense of confidence that
despite rising inflation or climbing interest rates, they were always protected by the
equity in their homes. However, if this erodes, spending along with economic activity
might slow significantly and October’s consumer confidence fell to -10 vs. -9
expected, down from -8 the month before.
The conundrum for the Bank of England to solve is: When do you lower interest rates
and loosen the economy in order to stimulate growth, especially given the state of
rising inflation and higher food, oil and energy prices. Sterling’s recent fall has been a
result of the market pricing in a cut in the near future. Two weeks ago, Mervyn King
all but announced that the loosening would come in February. Since then however,
the inflation report forecasted slowing growth in 2008 and King expressed major
doubts over underlying trends. David Blanchflower, another member of the MPC,
went as far as to call for a cut at this week’s meeting. So, on the whole, the outlook
for sterling looks pretty grim and longer-term we see GBP remaining in a downtrend.
But we think this might be a little too bearish in the short-term. The MPC are likely to
leave rates on hold this week and since the market is pricing in a cut at about 50%
we may see some near-term strength for the pound.
Sterling has edged up though today’s trading, temporarily breaking 1.41 against the
euro and clawing back some of Friday’s losses to the dollar.
The week ahead
• The Bank of England MPC announcement on Thursday. The majority are
expecting a no change decision but speculation has mounted that they may cut
early. Expected to remain at 5.75%
• Still with the UK, housing data should remain in focus. It is unlikely that the
Halifax house price index will show a rise.
• The Eurozone will also announce its rate decision this week. No change is
• Friday’s Non-Farm Payroll figures are likely to reflect the continuing slump in
the US. This will be the major release for the dollar.
0207 801 9084
Currency Rates Low High Current
GBPEUR 1.3891 1.4102 1.4075
The single currency finally weakened against GBP and USD last week as the outlook
for economic growth faltered over liquidity concerns. This however stood against
German consumer inflation figures of 3.0% in November from 2.6% previously,
concerns abound at the ECB. With the interest rates decision on Thursday, the ECB
must make a trade off between falling growth and rising inflation; a hold at 4% being
the consensus view. Trichet’s ‘post-match’ press conference will hold even more
value this month and any mentions of ‘vigilance’ may see Euro strengthen further.
GBPUSD “Cable” 2.0532 2.0832 2.0640
Once again the USD fell to record lows against the Euro on further speculation that
the Fed would cut rates at its next meeting, scheduled for the 11th Dec. Housing data
fell to lows not seen since the beginning of the current bull market as existing home
sales fell 1.2% and new home sales down 5.5% on previous month’s readings. The
Fed’s Beige Book also showed activity stagnating as the housing sector continued to
suffer. Uncertainties over global growth and credit conditions are likely to be very
important short-term market influences. There is still the potential for an unwinding of
carry trades which should provide underlying support for low-yield currencies. Overall
volatility levels are liable to remain higher, especially with tightening year-end
Credit Crunch fallout was tempered this week by Citigroup’s announcement of a cash
injection from the strategic fund run by the UAE authorities. This bolstered the carry
Low High Current
GBPAUD 2.3173 2.3886 2.3408
There was no particular key data down under last week however a decisive win for
the Labour Party in the previous weekends elections made sure subsequent volatility
was to a minimum. AUD speculators will be keeping an eye on global equity markets
as a recovery will strengthen the dollar in line with a lessening of carry trade risk.
GBPNZD 2.6638 2.7641 2.6937
NZD tested intraweek highs against the USD on Wednesday while the subsequent
bounce in global equity bourses helped underpin other commodity currencies. Data
wise, the National Bank monthly business outlook showed a decline in confidence
across the sectors apart from services, and a key decline in businesses’ confidence
about their own outlook. Dwelling consents, released Thursday, also fell however this
was countered by another positive day on Wall St come Friday.
GBPCAD 1.9867 2.0424 2.0642
News of a fire on the Enbridge pipeline between the US and Canada sent the price of
oil soaring and had a positive effect on the loonie. This however did not last and
news that the Current Account Surplus fell to CAD1.0bn from CAD6.3bn in Q3 and
falls in Industrial Product Prices weighed CAD down as it drifted towards parity with
Low High Current
GBPZAR 13.6726 14.1034 14.02
CPIX rose by 7.3% from 6.3% as higher petrol prices and transport costs weighed
heavily on consumers’ pockets. A rate increase in December is almost a foregone
conclusion. Governor Mboweni was forced to defend his inflation targeting policy,
similar to that of Ben Bernanke, by saying that low inflation was good for the
economically weak, anyone thinking otherwise should look at Zimbabwe. Whether
consumers can withstand any more belt tightening will play out in coming months as
a further rate increase is forecast for February 08.
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 calendar.
Please call us on 0800 001 5055 if you have any questions or would like to discuss the
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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 (November) (+1.0%)
EU-13: 10.00 PPI (October) +0.4% (+2.7%) +0.4% (+3.1%)
CAN: 14.00 BoC Rate Announcement 4.5% 4.25%-4.5%
AUS: 22.30 RBA Rate Announcement 6.75% 6.75%
OPEC: OPEC Meeting
EU-13: 09.00 Services PMI (November) 55.8 / 53.7 (p) 53.7
UK: 09.30 CIPS Services PMI (October) 53.1 52.9
UK: 09.30 Industrial Production (October) -0.4% (-0.2%) +0.1% (+0.6%)
– Manufacturing Production -0.6% (+-0.1%) +0.2% (+0.4%)
EU-13: 10.00 Retail Sales (October) +0.3% (+1.6%) -0.3% (+1.3%)
US: 13.15 ADP Employment (November) +106,000 +53,000
US: 13.30 Labour Costs (Q3 Revised) -0.2% -1.0%
– Productivity +4.9% +5.7%
US: 15.00 Factory Orders (October) +0.2% 0.0%
US: 15.00 ISM Non-Manufacturing (November) 55.8 54.7
NZ: 20.00 RBNZ Rate Announcement 8.25% 8.25%
JPN: 05.00 Leading Indicators (October) 0.0
GER: 10.00 Industrial Orders (October) -2.5% +0.9%
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 & Quarterly Economic Forecasts
US: 13.30 Initial Jobless Claims (w/e 1st December) 352,000 340,000
JPN: 23.50 GDP (Q3 Revised) +0.6% / +2.6% s.a.a.r.
– Deflator -0.3%
ITL: 09.00 GDP (Q3) +0.3% (+1.7%) +0.4% (+1.9%)
GER: 11.00 Industrial Production (October) +0.3% -0.4%
US: 13.30 Non-Farm Payrolls (November) +166,000 +73,000
– Average Earnings +0.2% +0.3%
– Unemployment 4.7% 4.8%
US: 15.00 Michigan Sentiment (December Prelim) 76.1 75.0
US: 20.00 Consumer Credit (October) $3.75bn $5.0bn2%
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.