Currency Market Update – Sterling Shines…

15, October 2009

Sterling for once is the star of the show. A large GBP/EUR sell order from a UK clearer kicked things off this morning, followed by a report in the FT that the BoE may hold back from extending its QE program as it felt the economy “was in good shape”. It now waits to be seen if this is just a rally in a downward trend for Sterling or potentially the start of a concerted rally.

The dollar again fell following the release of the minutes from the most recent Federal Reserve’s policy meeting. The minutes had a distinctly dovish tone to them, they indicated that just one member had advocated a reduction in the buying of financial assets, with most of the committee favoring an increase in Fed purchases in order to speed the economic recovery.

The overall tone was cemented when the discussion turned to the outlook for inflation with the suggestion being that the Central Bank is still a long way away from raising its interest rates. The dollar fell sharply to near 15 month lows against the euro, touching 1.4970 The Euro level is particularly interesting, with 1.4950-70 range having proved particularly Dollar supportive in the past (during the 4th Qtr of 2007) but upon breaking, the rate rushed up to just under 1.6000 where it remained for some time before falling back. Technical analysts are targeting 1.5700 as a near term objective.

Prior to the minutes’ release, equities was already having a good day with the DJIA breaking up through the 10,000 mark for the 1st time in more than a year. The spur here was the release of the JP Morgan quarterly earnings numbers which exceeded expectations and further increased the prospect of the financial system’s recovery. This positive sentiment was continued from earlier data from the UK which showed a reversal in the recent employment trend. This had underpinned Sterling during the day but it wasn’t until yesterday evening that the currency started to make headway across the board.

In a speech this morning, RBA Governor Stevens noted that interest rates in Australia will have to move to more “normal” settings as the severe downside risks to the economy seen earlier in the year had not come to pass. That suggests a move back to 4-5% for the cash rate; with current expectations for a move to 4.00% reasonably quickly with perhaps a 50bp hike in November followed by another 25bp hike in December, or maybe three 25bp moves finishing in February (the RBA are on holiday in January, so no meeting will take place).

Underlying inflation In Australia remains above the 2-3% target range and with consumer and business confidence recovering rapidly in recent months, the current monetary stance is clearly becoming inappropriate. New Zealand, not to be outdone, released their own set of economic numbers indicating that CPI was on the march in Kiwi-land as well. Qtr 3 figures for both qtr/qtr and qtr/year periods were much higher than expected which reinforces the view that NZ Dollar interest rates will follow Aussie rates on a generally higher tack.

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Compiled by Tom Nadir.

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