Currency Update

The English as a nation are a steady bunch who don’t like surprises, so it was as expected yesterday with David Davis returning to parliament and the Bank of England leaving rates on hold. Davis resigned, and stood for election in the same seat, to stimulate a debate on the 42 day detention law, a debate I must have missed, but we will get details of the debate over the no change decision within the MPC, we just have to wait 2 weeks to read it. With no surprises or direction from the MPC, the markets were left to ponder on the state of the UK economy, and the news from the Nationwide house price survey that prices had dropped 2% in one month, against expectations of a 1% drop, left the Pound was weakened; against the Euro the Pound dropped below 1.2550.

Over in the US there was more signs of problems caused by the housing sector. Fannie Mae and Freddie Mac are two privately owned, but government backed, mortgage lenders and between them they have provided or secured around half of all the mortgages in the US, therefore when Fed official says that the two were practically ‘insolvent’ it is no surprise that the stock markets start to sweat. The Dollar dropped, allowing the Euro to climb to 1.58, before rumours of a government backed buy out of the struggling mortgage lenders helped calm some of the fears, and allowed the Dollar to claw back a bit, but not much, of it’s fall. The Dollar’s late rally was helped by the weekly jobless claims data showing an unexpected drop after last weeks large rise.

With Iran continuing to test their missile technology, ramping up tensions in the middle east, it not a shock to see the price of Oil jump over $5/bbl to back above $140/bbl. The price had previously dropped from it’s record high near $145/bbl, but it looks like predictions that oil will rise higher, perhaps to $200/bbl could prove true if the political tensions in the middle east keep endangering the supply chain. The BoE’s wait and see approach to inflation, which relies upon the rises in energy prices rolling out of the CPI figure, so that the price of fuel may be high but not much higher than a year ago, is threatened if the price of fuel keeps on going up.

It’s a quiet end to the week after a batch of soft data out for the UK in previous days. this week has seem some extreme volatility in housing and banking stocks as certain companies struggle with the credit crisis. Perhaps more worrying there has also been talk of large job losses in the construction industry, the labour market is more flexible than in the past, which means we are all more easy to hire and fire, but if people start to worry over the security of their jobs, then the doom and gloom in the papers could get much worse.