United States Dollar: The risk aversion theme continued throughout the day yesterday, as investors moved out of riskier assets and currencies into so called safe haven products. Equity markets on both sides of the Atlantic suffered as a result, but US and UK bond yields fell on the back of a move into treasuries. US PPI, a measure of price change in finished goods and services, came in lower than expected at 0.4% versus an expected rise of 0.7%, adding further pressure to sentiment regarding the global economic outlook. TIC flows, detailing net purchases of US assets also came in lower than expected, highlighting a fall in foreign demand of USD denominated assets. In addition to these poor data releases we also learned that industrial production in the US remained flat, versus an expected increase of 0.4%. All this, coupled with ongoing negotiations in the EU regarding bailout packages, had the effect of driving down GBP/USD which fell from levels above 1.6080 to a low of 1.5840. Inflationary data out of the UK did little to support the Pound, with Bank of England Governor Mervyn King having to write a letter to Chancellor George Osborne outlining why inflation is more than 1% above the target of 2%. King explained that due to a rise in fuel duties, and a rise in commodity prices, that inflation would likely remain above target until at least the end of 2011. It is a wonder why Mr Osborne didn’t write a thank you note in response, thanking the MPC for inflating away government debt! Today we have MPC minutes which may give us more colour as to future policy moves.
– We expect a range today in the GBP/USD rate of 1.5800 to 1.5970
Euro: Ireland’s Finance Minister Brian Lenihan has been on the wires once more stating that Ireland is not in negotiations regarding its funding requirements, contradicting other minister in the Fianna Fail government who have confirmed that talks are happening. Either Mr Lenihan is not privy to such talks or he’s copying Greece’s attempt to calm markets by adopting a policy of ambiguity. After days of repeated statements from Greece’s Finance Minister confirming the non-existence of bailout talks, the markets were taken by “surprise” on news of a bailout package, even though so-called talks had never taken place. Ireland is coming under great pressure from other EU members to address the issue publicly, and make provisions to ensure funding can be met when bonds are due for refinancing next year. Austria waded into the fray stating that they would not release funds for bond guarantees if Greece does not meet its budget deficit reduction target of 8.1% of GDP by year-end (see http://bit.ly/afmXbi for more). Clearly the Euro is likely to remain under immense pressure until a resolution (announced publicly) is reached and there are adequate measures to ensure Ireland does not default on its debt obligations. Yields on Irish debt widened again to levels above 8.2% (compared to German 10yr yields of 2.6%). EUR/USD fell from 1.3655 to an intraday low of 1.3448, and trades slightly higher this morning at 1.3507. All eyes will be on any news releases from Brussels, where ongoing economic discussions are taking place.
– We expect a range today in the GBP/EUR rate of 1.1700 to 1.1850
Aussie and Kiwi Dollars: Demand for the high yielders came under pressure as a result of the ongoing debt crisis in Europe, pushing both the Aussie and Kiwi lower against a basket of currencies. Inflation concerns in China also did little to help short term economic sentiment. AUD/USD fell from 0.9890 levels down to a low of 0.9725. Overnight we traded back up slightly to levels around 0.9780 where we open this morning. Trading in the Kiwi was equally bearish, with NZD/USD falling from 0.7756 to a low of 0.7635 in the early hours of the morning. Going forward we have Australian wage price index data out early tomorrow morning, along with leading index figures.
– We expect a range today in the GBP/AUD rate of 1.6200 to 1.6400
– We expect a range today in the GBP/NZD rate of 2.0650 to 2.0850
Data Releases:
- AUD: MI Leading Index / Wage Price Index
- EUR: Meeting of Finance Ministers – Brussels
- GBP: MPC Minutes
- NZD: PPI
- USD: CPI / Housing Starts
