Currency Update

Currency Update

Yesterday was a quiet day for the Pound as the lack of new data left the currency on the sidelines. It was a quiet day all round for data releases, so the US leading indicator figures took prominence, rising unexpectedly and further reducing fears of a severe recession. The Dollar received a temporary boost from the figures, but soon fell back to previous levels. The Euro is testing 1.56 against the US Dollar this morning, and Sterling still sits around 1.9550.

The latest US data comes on the back of a general tentative optimism over the US economy which has boosted risk appetite, and coupled with the insatiable demand from China for industrial commodities  pushing up global prices, it is perhaps no surprise that the Australian Dollar hit a 24 year high. The latest boost was given to the Aussie Dollar by the RBA's rate decision minutes, which provided a much more hawkish tone than expected, noting that they 'spent considerable time discussing the case for a further rate rise in the cash rate.'. They may have discussed a rate rise, but the final decision was to keep rates on hold at 7.25%, but the minutes have once again raised the prospects of a future rate rise, and the RBA are again left watching the data. Australia has some of the same problems as the UK, high inflation and a slowing economy, although not to the same degree, so the bankers are left with the usual balancing act. The minutes sent the Aussie Dollar to a high of 0.9616 against the US Dollar, and sent the GBP/AUD rate down to around 2.0350.

Trichet gave a speech yesterday and continued the hawkish tone from the latest ECB press conference. However with signs of a slowdown in the Eurozone, and more signs of weakening expected, the talk is of whether the ECB will be forced to cut rates, before they are completely comfortable with the levels of inflation. Trichet's hawkish tone is still supporting the Euro for now, keeping Sterling down to around 1.2550 against the single currency.

We get further signs from the Eurozone this morning in the German economic ZEW index. This is expected to fall in measures of both the current economic conditions, and sentiment levels, so could provide some downward pressure on the Euro this morning. Later in the afternoon we have the US Producer Price Index, the expectations are for a small rise, but the risks are that as in the Eurozone and the UK, the global commodity prices give the figures a large push upwards, which could raise concerns over inflation and further confirm what many already think, that the US have reached the end of their easing cycle.

Once again the UK takes a back seat today, but tomorrow we have retail figures, and the BoE minutes from the last meeting, both of which have the potential to move the market.

Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited

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