7th December 2009
Daily outlook
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Currencies outlook
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Sterling
Monday saw the British pound buoyant against a weakening dollar as moderate risk-taking re-emerged, but the pound buckled under pressure against a broadly firmer euro. This morning sees Britain’s Lloyds Banking Group Plc pricing its record 13.5 billion pound rights issue at 37p per share, a smaller than expected discount, as it battles to escape a costly state-backed insurance scheme for bad debts. With little in the way of significant data out in the UK yesterday, pound movements were driven largely by market sentiment. Improved equity and commodity market performance was stoked by risk appetite and sterling was able to appreciate as a result. Today should see some key speeches from Bank of England members at the Treasury Select Committee hearing this morning. The Governor, Mervyn King; the Deputy Governor, Paul Tucker and MPC members, Paul Fisher, Adam Posen and Andrew Sentence are all due to give evidence on the Bank’s last quarterly inflation report. Because the Bank of England has raced far ahead of its peers along the quantitative easing road, traders will be keen to see if it could overtake other central banks in the reverse direction when the time comes to tighten. Still, the highlight for UK data this week will be tomorrow’s second estimate of UK third quarter gross domestic product, which many analysts expect to be revised up slightly from a first estimate reading of a 0.4% decline.
US Dollar
The dollar dipped against the euro and the pound on Monday, after a Federal Reserve official affirmed expectations that US interest rates would stay low for some time. Furthermore, strong US housing data dampened the currency’s safe-haven appeal. Because low rates would limit returns on many US investments, investors were prompted to diversify out of the currency to seek other riskier assets with higher yields. The dollar also gained little support from a US housing report, which showed a jump in existing home sales for October, which further spurred the market’s risk appetite and boosted higher-yielding currencies such as the Australian and New Zealand dollars. The housing data showed existing home sales soaring by 10.10% month on month in October to the highest level since February 2007 as Americans rushed to take advantage of a tax credit, cheaper properties and lower mortgage rates. Purchases rose more than forecast to a 6.1 million annual rate from a 5.54 million pace in September, the National Association of Realtors announced yesterday in Washington. Existing home sales were forecast to rise to a 5.7 million annual rate, according to the median estimate of 66 economists in a Bloomberg News survey. Today headline realises will be November’s US consumer confidence and preliminary GDP estimates for the third quarter of the year. Overnight also sees the release of Novembers FOMC meeting minutes.
Euro
The euro strengthened in early trading on Monday, after a key survey showed the Euro Zone’s service sector grew at its fastest pace in two years in November and exceeding forecasts. The Euro Zone Flash service PMI rose to 53.2 in November from 52.6 in October, suggesting an economic recovery will continue in the fourth quarter, albeit at a slower rate. The data marks a third straight month the index was above the 50-mark separating growth form contraction. Meanwhile, on Monday in Madrid, both European Central Bank President, Jean-Claude Trichet, and executive board member, Jose Paramo, discussed plans for the ECB to exit its quantitative strategy. Trichet claimed that as the situation becomes more normal, the focus in the medium term calls for a ‘gradual and timely phasing out of these measures’. In a similar vein Paramo had previously said that the ECB could detail plans for phasing out it s quantitative easing at the December meeting. Their remarks have boosted the view that the ECB is likely to exit its easing strategy ahead of the Federal Reserve, underpinning the euro against the dollar. Today sees the release of the Euro Zone’s industrial orders for September, where the expectations are on increase of 0.8% in September from the previous month. Detailed Q3 GDP figures for Germany are also up for release.
Japanese Yen
This morning sees the Tokyo markets playing catch-up after a three-day weekend. Subsequently, yen crosses have slipped as Japanese exporters sold the euro against the yen and hedge funds took profits on gains in the likes of the Australian and New Zealand dollars made on Monday. Meanwhile, Japanese cabinet ministers increased pressure on the Bank of Japan on Tuesday to respond to deflation, with one saying the central bank was ‘asleep at the wheel’. The government last week declared that Japan had entered its second bout of deflation in less than a decade as a public battle brews between the administration and the BoJ over how to manage the economy. Japanese retail investor sentiment towards domestic stocks fell for the third straight month to an eight-month low in November as Japan’s shares lagged recoveries in other countries.
