Market Report

The pound is headed for a second week of declines on speculation inflation in the U.K. is slowing, diminishing the case for more than one interest rate increase from the Bank of England. The U.K. currency dropped to the lowest in five weeks versus the euro and fell against the dollar yesterday after a government report showed sales at U.K. retailers unexpectedly fell in January by the most in four years. The pound fell earlier this week after a report showed U.K. consumer prices unexpectedly fell the most on the month in four years. The U.K. currency declined to its lowest since Jan. 8 versus the euro yesterday after the National Statistics Office said prices in Europe's second-largest economy slid 0.8 percent from December.

Builders in the U.S. probably started work on fewer new houses in January than a month earlier as a glut of unsold homes and the onset of colder weather discouraged new projects. The figures show that even as sales have rebounded, residential construction will remain a drag on the economy until the number of unsold homes declines. Federal Reserve Chairman Ben S. Bernanke told lawmakers this week that the process may extend through much of the year.

Volatility on options on the Swiss franc against the euro approached an eight-month high as traders speculated the currency will rebound from a record low reached this week. Traders are using options to protect against the risk of a recovery in the franc after Swiss government officials suggested the currency may rally.

The South African rand may fall for the first day in four after the central bank decided to keep interest rates unchanged, boosting speculation the country's authorities favor a weaker rand to boost growth. The spread, or gap, in yields between South African benchmark 10-year debt and similar maturity Treasuries has narrowed 15 basis points since the year began, reducing the appeal of rand-denominated assets. The central bank, led by Governor Tito Mboweni, yesterday kept the repurchase rate at 9 percent, saying inflation will stay within target.

LR

The pound may fall after an industry survey showed house prices gained at their slowest pace in seven months in January. The pound advanced from near the lowest in more then a month yesterday after Bank of England policy makers hinted that interest rates may need to increase to bring inflation back below its 2 percent target. A separate report today will probably show retail sales increased for a fourth month in January, according to a Bloomberg News survey of economists. U.K. retail sales probably increased for a fourth month in January as shoppers took advantage of after-Christmas discounts, a survey of economists shows. The Office for National Statistics will release the figures today at 9:30 a.m. in London.

Ben S. Bernanke is betting his credibility with investors that inflation can be reduced without much cost to economic growth and employment. The Federal Reserve chairman told the Senate Banking Committee yesterday that his preferred gauge of inflation will fall to or be below 2 percent next year, largely because of lower prices for oil, commodities and rent. The Fed also predicted unemployment will stay below 5 percent through the end of 2008. Industrial production in the U.S. probably remained steady in January as companies held off on new orders while continuing to pare inventories, economists said before a Federal Reserve report today.

LR

The Euro advanced on Tuesday, gaining strength from data showing growth in the Euro zone and an upbeat survey of German business conditions. Euro zone gross domestic product expanded by 0.9 per cent in the fourth quarter, giving an annual growth rate of 3.3 per cent. Meanwhile, Germany's ZEW investor confidence survey pointed to a pick-up in its economy later in the year as the impact of a rise in value added tax in January wears off. By mid-afternoon in New York, the Euro was up 0.4 per cent at $1.3015 against the dollar and 0.7 per cent to £0.6700 against the pound. The Euro lost ground against the yen, however, dropping 0.1 per cent to Y157.80 as the Japanese currency recovered from its post-G7 meeting slump. The move reflected increasing expectations that tomorrow's Japanese GDP data could prompt the Bank of Japan to raise interest rates at its policy meeting next week. However, Hiroka Ota, Japanese economy minister, said she expected the Bank of Japan to make its monetary policy decision based on an "analysis of recent data". She added there was no change to the official view on economic conditions, highlighting the view weakness in consumption was expected to linger.

The yen also advanced against the dollar, rising 0.5 per cent to Y121.30. The dollar was put under pressure as the US trade deficit widened further than expected from $58.1bn in November to $61.2bn in December. However, analysts said market reaction was muted ahead of today's semi-annual testimony before US Congress from Ben Bernanke, chairman of the Federal Reserve. In contrast, the Canadian dollar rose 0.6 per cent to C$1.1680 against its US counterpart as the Canadian trade surplus came in higher than forecast at C$5bn in December.

Meanwhile, weaker UK consumer inflation data drove sterling to one-month lows against both the dollar and the Euro as expectations of further near-term interest rate rises faded. Consumer price inflation rose by an annualised 2.7 per cent in January, lower than forecasts of 2.9 per cent as fuel costs eased over the month. Having reached 3 per cent in December, any additional increase would have left Mervyn King, governor of the Bank of England, having to explain in an open letter to the Chancellor of the Exchequer why the bank had exceeded its inflation target ceiling. Mr. King will be breathing a sigh of relief today, I dare say.

NC

The yen fell to a fresh all-time low against the Euro on Monday after the communique following the Group of Seven meeting of finance ministers and central bankers over the weekend made no specific reference to the currency's recent weakness. There had been fears, following increasing rhetoric from European officials in the run-up to the meeting that some reference might be made to the yen in the communique. In the event, the G7 statement made no mention of the issue, instead acknowledging solid and balanced growth in the US, UK and Canada, broad-based growth in the Euro zone and noting that Japan's recovery was on track and expected to continue. However, the G7 added it was confident that the implications of the economic developments it highlighted would be recognised by market participants and would be incorporated in their "assessment of risks". Analysts took this comment as a veiled reference to the risks of the continued build-up of carry trades. The popularity of carry trades, in which investors fund long positions in high-yielding currencies by selling low-yielding currencies such as the yen, has helped push the Japanese currency to a series of multi-year lows in recent months. Indeed, in subsequent comments, European officials stressed that the statement related to carry trade activity. "We want the market to be aware of the risk in one-way bets, in particular on the foreign exchange markets," said Jean-Claude Trichet, president of the European Central Bank.

The yen fell to a record low of Y159.00 against the Euro, before pulling back to Y157.90 by mid-afternoon in New York, up 0.2 per cent on the session. Meanwhile, the yen fell 0.1 per cent to Y121.80 against the dollar, within striking distance of its four-year low of Y122.19. The dollar also advanced against the Euro, rising 0.3 per cent to $1.2960, as investors looked ahead to the semi-annual monetary policy report from Ben Bernanke, chairman of the Federal Reserve, due to be delivered to the US Congress on Wednesday and on Thursday. The dollar also edged 0.2 per cent higher against the pound to $1.9470 as UK producer price inflation came in weaker than expected.

Elsewhere, the Australian dollar fell 0.6 per cent to $0.7720 against the dollar after the Reserve Bank of Australia's inflation outlook was less hawkish than expected. The RBA cut its 2007 inflation forecast from 3 per cent to 2.75 per cent, saying inflation pressures might have been contained as domestic demand moderated and wage growth stopped increasing. The South African rand dropped 1.4 per cent to R7.2640 against the dollar as expectations were cut back that the South Africa Reserve Bank would raise interest rates on Thursday. The move was sparked by comments from Thabo Mbeki, South African president, who said that interest rates were not the only tool to control spending, adding that they were a "blunt" instrument.

NC

The yen endured a volatile ride this week as investors awaited the outcome of the meeting of finance ministers and central bankers of the Group of Seven industrialised nations. The official communique following the meeting, which got under way in Germany on Friday, has been the focus of much speculation as European officials mounted a vociferous campaign to put the yen's recent weakness in the spotlight. The Japanese currency has come under pressure in recent months, hitting a series of multi-year lows against the dollar, Euro and sterling amid continued investor appetite for carry trades, in which long positions in high-yielding currencies are funded by selling low-yielding currencies such as the yen.

The Euro climbed against the dollar and sterling in the wake of the European Central Bank's press conference following its interest rate decision on Thursday. The ECB, as expected, left Euro zone interest rates at 3.5 per cent and clearly indicated that it would raise rates at its March meeting. However, following recent reports on the newswires, there had been rumours that the ECB would signal a pause its monetary tightening cycle thereafter. But analysts said Mr Trichet dispelled the notion. "The ECB President could hardly have been any clearer," said Thorsten Weinelt, chief strategist at UniCredit. "The tightening cycle will continue. Speculation on an interest rate pause following the rate hike at the beginning of March is now totally off the table." The Euro rose 0.3 per cent to $1.2995 against the dollar and climbed 1.1 per cent to £0.6668 against sterling on the week. Meanwhile, the pound tumbled as the Bank of England left UK interest rates at 5.25 per cent at its policy setting meeting on Thursday. The central bank's lack of action came as no surprise to the majority of analysts, however, sterling had been well supported before the decision, with investors reluctant to sell the currency given the surprise rate rise delivered by the BoE in January. Analysts said the pound's sharp reaction to the decision also reflected the fact that the BoE's monetary policy committee would have seen the contents of the UK Inflation Report, due for release next Wednesday.

Today's producer prices data is expected to show that input prices in January fell a seasonally adjusted 0.8 per cent dragging the yearly rate to a negitive 0.4 per cent from 1.9 per cent in the prvious month. Out put prices should rise 0.1 per cent on the month, easing the yearly rate to 1.9 per cent in January from 2.2 per cent in December, while core output prices are expected to grow a monthly 0.2 per cent leaving the annual rate unchanged at 2.4 per cent.

NC

Archived Market Reports