Market Report

The USD has been put under pressure this week as US policy makers decided to keep interest rates unchanged, propagating further the view that the US economy is slowing and inflationary concerns are waning. We are currently poised just above the lows of the recent weeks ranges waiting for the stimulus of GDP data out this afternoon to give us the energy to break the range to the low side for the USD or resume USD strength. The expected value for GDP from the market is 2.0% QoQ down from 2.6% last.

The GBP has benefited from the recent spate of USD weakness and is heading for its second weekly gain. In the UK concerns about inflation still persist and the very real threat of higher rates still looms on the November horizon. The pound also rose as a report showed mortgage approvals rose last month, suggesting the housing market has shrugged off the August interest rate rise.

On the inflation front in the UK a report from NIESR (The National Institute for Economic and Social Research) suggests that inflation will accelerate to the fastest pace in at least nine years this quarter, further adding to the positive GBP sentiment.

Overall we still feel that GBP is a sell at these levels however the market seems disinterested to move away from the established ranges at this point.

NS

The US Federal Reserve elected to keep rates unchanged last night, stating that the “economy is expanding and inflation is under control.” The market has been pricing in a slowdown in the economy to a sustainable rate and inflation continuing to decline. The Fed statement did nothing to alter this view. US stocks have continued upwards on the back of the Fed and have now had their longest ‘winning streak’ since March.

The focus in the US is now on the advance GDP data Friday afternoon that will give us further clues as to the extent of the slowdown. The USD has weakened since the Fed statement and will continue to be on the back foot into Friday’s data.

GBP declined against the EUR yesterday as US rate hikes and concern over the sustainability of mortgage applications in the UK have tempered expectations of further rate hikes, despite MPC member Charles Bean’s comments that the MPC should “err on the side of caution” to curb inflation.

In other notable FX news the Swedish Riksbank raised rates for a 5th time this year to bring rates up to 2.75 as the economy grows at its fastest rate in six years and unemployment falls. The Swiss finance minister made a statement yesterday that a further decline of the Swiss franc from a six year low against the EUR is not desirable and the country should “look after” its currency. His comments come in the light of a large pick up in speculative carry trades exploiting the low Swiss interest rates in selling short the currency against the high yielding AUD and NZD.

VC

Yesterday Sterling continued to slip against the dollar, although movement was slight it seems everyone is waiting for U.S. Federal Reserve's interest rate decision this evening.

Data yesterday showed British manufacturers' order books shrank in October at their fastest pace since the start of the year and slowed slight negativity towards GBP early on. The Confederation of British Industry's October manufacturing orders survey plummeted to -20 from -5 in September. Caution ahead of this evenings fed's meeting seemed to have helped to protect the pound from heavier selling, and ensured once again the Euro held steady.

The greenback was firm across the board yesterday ahead of today’s U.S. Federal Reserve's meeting that is expected to leave borrowing costs on hold for a third straight time at 5.25 percent otherwise another quite day on the data front.

Some data from German today is CPI and IFO but should have little affect, and there looks to be around 80% that the next move for the Euro zone interest rates will be in the first quarter or 07.

Australia’s CPI data surprised that market rising to 0.9% Q/Q and 3.9% Y/Y leading to the RBA possible hiking interest rates in NOV.

NZ third Quarter CPI data came out a little lower than the market expected it came out at 0.3% Q/Q and 3.0 Y/Y this should lead to RBNZ reducing the chance of a rate hike on tomorrow.

South African inflation likely to keep rising. CPI and CPIX inflation readings for South Africa, due Wednesday, likely will continue the upward trend, although considerable uncertainty surrounds this month's forecast (due to offsetting influences from falling gasoline prices and the weaker ZAR). Even if inflation decelerates in the near term, the SARB's focus on robust domestic demand likely will keep the authorities on track for a December rate hike.

DH

Yesterday Sterling weakened after last weeks rally against the dollar and failing once again to push the Euro below key technical support. The greenback surged across the board in a technical rebound from last week's dip, as traders adjusted positions ahead of the Federal Reserve's policy decision and statement on Wednesday.

Sterling drew support last week from British growth data that came in slightly above expectations leading for Bank of England interest rates to rise next month. All 46 economists polled by Reuters after the above-consensus data on Friday said they expected the Bank to raise rates by 25 basis points to 5 percent next month. The Bank of England gives its next verdict on interest rates on November 9. Minutes of its last policy meeting showed two Monetary Policy Committee members voted for a rate rise, although the majority voted for steady rates.

With regards to the ECB, it seems to be leaving itself ample room for manoeuvre on the 2007 outlook, and is refusing to commit to, or signal, any further hikes until the release of revised ECB economic forecasts in December.

In the last 24hrs we have seen GBP gain 2% against ZAR, in the wake of a speech by the central bank governor yesterday reiterating the inflationary risks facing South Africa

Today at 11.00 we see the release of CBI total orders from the UK. New orders growth measured in the CIPS manufacturing report rose in September, while the CBI industrial trends survey for the month revealed that manufacturers' thought output growth would pick up over the next three months. Given these factors, we look for September's CBI total orders balance to rise to -2, from -5 a month earlier. Markets expect an outturn of -4.

At 18.30 this evening Charlie Bean, Bank of England Chief Economist and Monetary Policy Committee member, gives a speech at the London School of Economics on globalisation and inflation.

DH

There was a shock Philadelphia Fed's survey result for September, showing the first negative figure for three years. The Euro and the Pound gained against the dollar on the back of this.

Today sees very little in the way of economic data, but later in the week we have some important releases. The FED meets on Wednesday to decide on US interest rates. It is expected that they will decide to keep rates on hold at 5.25%. We will also see September data on US housing sales, which may have an impact on the Dollar.

He only data of note from the UK this week is the CBI manufacturing survey on Tuesday, but this is unlikely to have any impact on the markets.

Have a good day.

DE

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