United States Dollar: The dollar strengthened further yesterday and continues to do so into London open this morning. Lingering worries regarding sovereign default risk in the Eurozone continue to weigh on sentiment, pushing risk premiums higher along with so-called safe haven assets like the US dollar. In the US retail sales came in stronger than expected, growing by 1.2% in October versus an expectation of a 0.7% increase. Economists shrugged off worse than expected Empire State Manufacturing data which showed the index dropping to -11.1, versus an expectation of 13.9. Whilst this is not a great reading, this particular economic release pertains only to Manufacturers in New York state, and thus isn’t a bellwether for the US economy overall. In the UK, MPC member Dr Martin Weale has alluded to the possibility of further quantitative easing should economic conditions not improve in the medium term. He added that the Bank of England is aware that inflation is likely to stay above target for some time, effectively further eroding the value of savings, which have now been earning negative real interest rates for some time. GBP/USD fell from a high of 1.6154 to a low of 1.6040 yesterday. We open at similar levels today having dropped to a low of 1.6018 this morning. Today we have inflationary data out in the form of CPI figures from the UK, and as it’s likely to be above 3% we should also see the BoE’s letter to the Chancellor. Mervyn King is also speaking this evening before the House of Lords Economic Affairs Committee.
– We expect a range today in the GBP/USD rate of 1.5950 to 1.6060
Euro: Contagion seems to be the buzzword once more as Ireland continues to sully the reputation of other EU economies with poor fiscal standings. Portuguese Finance minister Fernado Teixeira dos Santos has stated that Portugal is likely to need financial help should the panic continue and bond spreads (yield over and above German treasuries) continue to widen. Although yields on Irish debt have fallen since the start of last week they still remain at unsustainable levels (10yr bonds fell to 8.1% yesterday). EU Finance ministers will meet in Brussels today to discuss issues surrounding a possible bailout package for Ireland. At their disposal are the European Financial Stability Mechanism (EFSM; 60 billion Euros) and access to the European Financial Stability Fund (EFSF; 440 billion worth of guarantees). Potential costs in the short term could come to 70 billion Euros, coming from a mixture of the two funding facilities. Ireland are reluctant to take such assistance in the fear that the EU may intervene in its economic policy, possibly reversing a decision by the incumbent government to guarantee public sector jobs. EUR/USD fell as a result of these ongoing concerns and dropped to 1.3560 levels overnight. We open higher this morning at 1.3610. We have European CPI data out today but investors will likely be looking for news from Brussels regarding bailout packages.
– We expect a range today in the GBP/EUR rate of 1.1700 to 1.1850
Aussie and Kiwi Dollars: Trading in the Aussie was volatile yesterday, and attitudes towards sovereign debt worries in the Eurozone drove short term sentiment. Demand for the Aussie was good early in the session yesterday, buoyed by good demand for Aussie equities. But as the US session opened risk sentiment turned once more and the Aussie dropped to 0.9817 from a high at 0.9920. Financial stocks in Australia performed well on the back of positive corporate news from the Commonwealth Bank which drove demand higher in the short term. Conversely, new motor vehicle sales came in lower than expected, dropping by 0.6% compared to the previous month. RBA minutes released overnight go some way to explain the rationale behind the recent rate rise, alluding to good employment and a gradual rise in prices that meant monetary policy could be tightened further. In New Zealand the Kiwi was also the victim of “short-termism” brought about by changes in risk sentiment. Despite a positive increase in retail sales the Kiwi sold off from levels above 0.7770 down to 0.7700 this morning. Going forward many NZ watchers will be looking for news from both the European Union as to bailouts, and from China regarding monetary policy, which drives demand and thus how much exporting business NZ conducts.
– We expect a range today in the GBP/AUD rate of 1.6200 to 1.6300
– We expect a range today in the GBP/NZD rate of 2.0600 to 2.0800
Data Releases:
- AUD: MI Leading Index
- EUR: CPI / EU Finance Meeting Brussels
- GBP: CPI / Inflation Letter / BoEs King Speaks
- NZD: No data of note
- USD: PPI / TIC Long Term Purchases / Industrial Production / NAHB Housing Market Inde
