“Investors take some chips off the table”
Yesterday we were again joined by our friend “risk aversion” as the equity markets digested a gloomier than expected outlook from Mervyn King in the quarterly inflation report and we had weaker retail sales from the US.
The fall out in the currency markets was a snap back into USD and Yen strength- cable (GBP/USD) dropped from 1.53 to 1.51 and the Yen gained across the board including against the USD. The main losers in the currency markets were sterling and the higher yielding currencies such as the AUD, NZD and ZAR.
The markets are still driven by movements in the equity markets and a continuing battle between risk appetite and risk aversion is still creating see-saw trading ranges. The uncertainty in the currency markets echoes the uncertainty in the global economy- a theme stressed by Mervyn King yesterday. Kings projections were underlined with the ideology that we are not dealing with a normal business cycle so it very difficult to pinpoint when a recovery will materialize.
He noted that “There are real risks from the nature of the downturn and the role of the financial sector, that mean this could be a slower return to normal growth paths than we might have expected had this just been a normal business cycle”
The report summarized that growth will recover more slowly than previously forecast- a contraction of 4.5% this year and inflation should fall to 0.5% this year and remain below the 2% target for the next three years. The MPC will be well aware of the conflicting inflationary pressures in the UK economy with the inflationary effect of QE not likely to be seen for months battling against contracting demand, falling food and commodity prices and rising unemployment. Expect to see no change in interest rates for the foreseeable future but a constant review and tweaking of QE in the months ahead.
In the US retail sales data disappointed at -0.4% against the expectation of remaining flat- although the data was not as bad as last month it still triggered a move back into risk aversion trends.
Report by Phil McHugh, Corporate Foreign Exchange
The contents of this report are for information purposes only.
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