United States Dollar: The dollar strengthened yesterday on a fresh bout of risk aversion, a move that was less about profit taking on long positions and more to do with repositioning ahead of data releases and new from China regarding interest rates. GBP/USD fell from levels around 1.5943 at the beginning of yesterday down to 1.5680 before starting on a path to recovery this morning. Despite upcoming GDP figures from China which are likely to show growth slowing to around 9.6% (from over 10%), the Peoples Bank of China raised one year interest rates from 5.31% to 5.56% to curb inflationary pressures. This surprise increase caught many unaware and equity markets in the Asian region fell as investors took stock of the likely impact of the decision. The dollar benefitted from this in the short term as people sought cover of safe haven assets. Today we have a number of releases out from the UK, including the spending review, which begins at 11:00, with the financial review likely to be closer to 12-12:30.
– We expect a range today in the GBP/USD rate of 1.5625 to 1.5850
Euro: The Euro also suffered on the back of this flight to safety and switch into safe haven assets, falling from levels just above 1.4000 to a low of 1.3697 in the early hours of this morning. There are divisions amongst economists as to the likely future path of the Euro in the coming weeks and months. Some analysts believe that there are growing national divisions, highlighting the difference in performance between northern and southern European economies, which, they state, are increasing. Others still firmly believe that whilst risks pertaining to sovereign default risk still remain, those risk are much less than they were two months ago when Greek financing rates were approaching 12% for 10 year bonds. The Euro is likely to be driven by risk sentiment in the short term, and more so by any news regarding quantitative easing from the US, which is likely to have the effect of further cheapening risk, and driving up the value of assets such as commodities and ultimately the Euro. GBP/EUR peaked at levels close to 1.1440 overnight before selling off down to levels around 1.1385. We open this morning at 1.1400.
– We expect a range today in the GBP/EUR rate of 1.1300 to 1.1500
Aussie and Kiwi Dollars: The Aussie sold off sharply on the news that China had increased one year rates, and this was on the back of the view that the increase could have the effect of dampening demand for assets, and directly impact exports from Australia to China. Gold also sold off sharply, adding to the negative impact of the decision. Mining stocks fell in line with the sell off in gold, but the move to safe haven assets was short lived, and the Aussie has risen from a low of 0.9663 in the early hours of this morning to levels above 0.9780 where we open. Going forward we have Chinese GDP figures out in the early hours of tomorrow morning which is likely to provide short term volatility in any AUD crosses. In New Zealand the Kiwi also fell as a result of the Chinese news and recovered in the same fashion as the Aussie. RBNZ Governor Bollard spoke overnight about the bank’s decision to leave rates on hold, stating that the risks were “finely balanced”, as a recent rise in the Kiwi had dampened inflation expectations somewhat, lessening the need for monetary policy intervention. NZD/USD fell to 0.7427 from a high of 0.7600 yesterday. We open slightly stronger around 0.7480 this morning.
– We expect a range today in the GBP/AUD rate of 1.6000 to 1.6200
– We expect a range today in the GBP/NZD rate of 1.0920 to 2.1120
Data Releases:
- AUD: No data of note – but Chinese GDP figures likely to provide volatility
- EUR: No data of note
- GBP: MPC Minutes / Public Sector Borrowing / Spending Review
- NZD: Visitor Arrivals
- USD: Fed Beige Book / Crude Oil Inventories
