US Dollar:
The dollar was up against the euro this morning as weak stocks prompted traders to pull out of the risk sensitive single currency and protect themselves with dollar purchases. Falling share prices provided the risk-aversion signal that caused many investors to pull out of the euro and into the dollar. The dollar also fell against the yen, traditionally the strongest currency when the market shows risk aversion in its strategy. Many expect the dollar to come back though, especially with growing speculation that the Bank of Japan might be forced to consider taking additional accommodative monetary policies, with the Japanese Government likely to declare on Friday that the nation’s economy is in deflation. The dollar lost ground against sterling this morning as global investors continue to have faith in the global economic recovery and are willing to bet on the higher yielding U.K currency. GBP/USD currently down at 1.6677, while EUR/USD is in the dollars favour at 1.4873.
Pound:
Sterling is continuing to trade down further this morning against the Euro and the USD at 1.1207 and 1.6667 respectively as yesterday’s BoE minutes continue to be digested by the market. The minutes of the last MPC meeting showed seven of the last nine members voted in favour of the £25bn hike. However their was some disagreement amongst “the camp” as Chief economist Spencer Dale favoured no increase and another voted for a £40bn pump. This was clearly not the best outcome for these minutes as the question remains over whether our central bank will increase QE beyond £200billion, without a clear answer on this, the market will continue to speculate. In other damaging news for the UK business leaders reported in the Telegraph that the Government’s finance focused Queen’s speech amounted to a “legal minefield” that will damage London’s position as a global economic centre. In further news on the UK banking sector chief executive at Experian (yes those guys that let lenders know if you can borrow money or not) said clients in the US and on the continent are recovering but those in the UK remain “more challenged than in any other market” He also went on to mention that none of the UK banks are thinking about growth and that defaults have not yet peaked. Any poor news on the UK banking sector as always undermines the growth outlook for the UK and recovery of sterling. We may well see some support for sterling this morning if retail figures due out at 9.30am impress. Retail sales are expected to increase from 0.0% (flat) last month to 0.6%. If this number or higher is achieved the pound should rally from the probability that revised GDP figures for last quarter will be adjusted upwards. Revised GDP numbers are due out at 9.30am next Wednesday., and will be watched closely.
Euro:
The Euro fell against the dollar and yen this morning as traders sold off the euro as a result of weaker stock and share prices in Japan. U.S investors based in Japan took their cue from these falling share prices as a signal to be more cautious, with many traders decreasing their euro-holdings before the Thanksgiving Holidays. The actual number of traders selling the euro was small, but had a larger impact as flows in Asia were thin. It’s expected that the euro will strengthen from next week as that’s typically when European financial firms repatriate their overseas investments ahead of the year end. The Euro is also expected to remain strong due to the outlook for the global economy and interest rates. It is believed the Bank of Japan and the Federal Reserve will keep their policy rates low over the coming months, during which time the European Central bank may signal a near-term rate-hike. Economic growth potential isn’t expected to be as strong in the U.S or Japan. The current strength of sterling against euro is historically something that is followed by a shift in rate expectations in favour of the pound, indicating that sterling strength could be unsustainable for long. EUR/USD currently 1.4873, GBP/EUR 1.1211.
Daily Quote
“One problem with gazing too frequently into the past is that we may turn around to find the future has run out on us.” – Michael Cibenko
