United States Dollar: Trading was relatively quiet yesterday given that it was a US and Japanese holiday. The press was filled with discussion of the recent G10 and IMF meetings in Washington, with financial press focusing on the lack of resolution reached. IMF MD Dominique Strauss-Kahn has stated that he is disappointed with the outcome of the talks, and with tensions rising between the US and China over differing opinions on monetary and fiscal policy it is likely that currencies and currency manipulation will remain at centre stage in any upcoming meeting of economic heads. US Treasury Secretary Tim Geithner has rattled Chinese officials by once again drawing attention on China’s policy of currency fixing, saying that China must let the Yuan rise in order to boost Chinese domestic demand and thus growth in other G10 economies worldwide. Chinese premier Wen Jiabao has waded into the row by adding that the US cannot claim to be exempt from currency manipulation policies, as any quantitative easing is effectively a currency play (increasing supply of dollars thus reducing demand and lower dollar’s value). GBP/USD traded down from 1.5960 levels to a low of 1.5860 in the early hours of this morning on the back of small risk aversion and trade (USD short) unwinds. .
– We expect a range today in the GBP/USD rate of 1.5800 to 1.5980
Euro: Current Euro strength has once again sparked conversation amongst EU officials as to the damaging rally that we’ve seen over the past month. Competitive EU nations such as Germany and France can effectively manage any Euro increase, as exporters are more able to shoulder reductions in margin than their southern European neighbors (in countries such as Greece and Spain). Because of the potential extension of QE in the US investors have become increasingly more comfortable buying riskier assets to earn a higher yield, and this includes buying European equities as well as government bonds that have been at the centre of damaging speculative attacks. Yields on Greek 10yr bonds fell to as low as 9.2% (having previously been higher than 11.5%), thus illustrating a decrease in risk sentiment. Over the next few days, as we learn more of the plans for QE in the US, we are likely to see further risk buying as investors park cheap funds in higher yielding assets. EUR/USD traded lower yesterday from 1.4005 down to levels around 1.3880. We open around 1.3800 this morning.
– We expect a range today in the GBP/EUR rate of 1.1420 to 1.1550
Aussie and Kiwi Dollars: The Aussie also retreated on the back of trade unwinds. The recent rally from 0.8771 on the 25 Aug has seen many investors move into the commodity currency, and data releases in the last two weeks have supported speculative purchases of the Aussie. Worries that upcoming FOMC minutes won’t be clear on future QE plans caused concern amongst those investors who have open long positions, and we saw the Aussie fall from 0.9906 yesterday to a low of 0.9772 where we open today. Until we hear more about firm plans regarding stimulus packages, trading in the high yielders is likely to be volatile. In New Zealand, Reserve Bank Governor Alan Bollard has said that NZ’s economic recovery is proving to be “slow and fragile”, adding to the economy’s worries and causing investors to unwind recent purchases. NZD/USD fell from 0.7574 yesterday to a low of 0.7482 in the early hours of this morning. We open slightly higher at 0.7490.
– We expect a range today in the GBP/AUD rate of 1.6150 to 1.6250
– We expect a range today in the GBP/NZD rate of 2.1070 to 2.1270
Data Releases:
- AUD: No data of note
- EUR: ECB’s Trichet speaks, again (17:20)
- GBP: CPI data / MPCs Miles Speaks / Trade Balance Figures
- NZD: FPI data
- USD: FOMCs Hoenig Speaks
