Currency Update
As despondent Chelsea fans, and ebullient Man U fans, return home from Moscow they should be thankful that they are not travelling by American Airlines, who are one of the first Airlines to start to feel the influence of the higher oil prices by shedding jobs, and now charging all customers a fee to take any luggage on board. The price of Oil hit a new high yesterday, above $133 per barrel, again weighing on the Dollar. The FOMC minutes may have given the Dollar some support, indicating, as they did, that ‘several members noted that it was unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further’, however with the FOMC also cutting their growth predictions, and expecting inflation to remain ‘elevated’, then the US is facing the same problem as the UK, namely stagflation.
The broadly weaker Dollar has allowed the Euro to climb above 1.58 on the back of a unexpected rise in German business confidence. The ZEW survey earlier in the week pointed to decent levels of current activity, but to gloomy expectations, however with yesterday’s rise in German confidence the market expect that the ECB have now got a bit more space to leave interest rates were they are, as a serious Eurozone slowdown may be a bit further off than previously thought. With the ECB still keeping their hawkish rhetoric a rate cut anytime in 2008 seems a distant possibility.
The Euro pushed the Pound lower, below 1.25, as the MPC minutes failed to provide much of a boost for the Pound. The minutes showed a 8-1 vote for no change, with the seemingly single minded Blanchflower still voting for a cut, even with inflation at 3%. The minutes did show that inflation ‘was higher than the committee had expected’ and that ‘reducing inflation from persistently high levels has in the past required prolonged periods of subdued economic growth’, although since inflation is driven by global factors even this may not be enough. The MPC were worried that a further rate cut would erode the confidence the market has in the MPC’s commitment to fighting inflation. The feeling from the minutes is that there are a few others who would like to vote for a cut along with Blanchflower, but with inflation at these levels it is not really possible to consider acut anytime soon; however as soon as inflation starts to moderate, the talk of rate cuts will be back to the fore. Sterling managed to rally above 1.97 against the US dollar yesterday.
It’s a slow data day for the Eurozone and the US, so the UK takes centre stage. Retail sales have just come in and posted a 0.2% drop, and it seems that the much maligned GTAIV (made by a UK company), and the Wii fit, may have had an effect, with a surge in the sale of video games helping to dampen the effect of a decrease in spending elsewhere. With the market expecting a drop of between 0.4% – 0.5%, the news has actually given Sterling some support. The fact that Sterling has jumped significantly on the better than expected report is probably due to another release which showed a drop in business investment in the first quarter of 2008.
Later today the CBI Industrial trends survey is released and is likely to show a further decline which may wipe out some of the strength from this morning’s retail report.
Michael Corcoran – Assistant Manager |Treasury Solutions | nabCapital™ | A division of National Australia Bank Limited