Currency Update – Thursday 2nd October

The populist lower chamber of Congress may have rejected the bail out plan, but the Senate have taken a more measured view, as it was designed to do, and passed the bill by roughly 3-1. The Bill now goes back to the house to see if the delegates there have changed their mind, but with it remaining extremely unpopular amongst the general populace, the passage through the House of Representatives is not guaranteed. The passage of the bill through the Senate does represent a step forward, and the Dollar strengthened ahead of the vote, and kept it’s gains afterwards. The Pound sits around 1.7650, and the Euro has been pushed down to below 1.3950, against the Dollar.

Away from the grinding pace of US politics, there was some very depressing data from the ‘real’ economy with manufacturing surveys showing a drop in the US to recession territory, the Eurozone staying weak, and the UK index showing a sharp drop to a 16 year low. There was some better news from Japan’s manufacturing figures, which showed a small rise, although still to a weak level, and China came through with the only good news of the day with signs that their manufacturing index, which had been a bit weaker in previous months, has grown back into levels showing expansion. China however couldn’t stop JP Morgan’s global manufacturing PMI from declining, and the slower expected global growth has again weighed on commodity prices with oil falling backwards, and industrial metal prices falling back to their lowest level since April 2006.

Sterling has been running up and down a range between 1.25 and 1.27 for the past few weeks, but uncertainty over today’s ECB rate decision, and signs that the banking crisis is spreading onto the European mainland have weakened the sentiment for the Euro, and Sterling has climbed above 1.27, in spite of it’s own disastrous manufacturing index.

We’ve already had the Nationwide House Price survey out for the UK, which un-surprisingly showed a further fall of 1.7%, taking the annual rate down to 12.4%. The big event of the day will be the ECB rate decision and press conference. Although a rate cut at the moment would be very surprising, the press conference is likely to further acknowledge slowing growth in the Eurozone, and with inflation seemingly having peaked, Trichet’s comments will be closely watched for any hints of rate cuts to come.

Michael Corcoran | Treasury Solutions | nabCapital