Currency Update – Thursday 9th October

Currency Update – Thursday 9th October

Well we knew the reduction in rates was upon us, however the united front shown by the G7 central banks did take the market a little by surprise.

Explaining the rate cut, the MPC argued that 'the Committee remains focussed on setting Bank Rate in order to meet the 2% inflation target.  In doing so it continues to balance two risks.  On the downside, there is a risk that a sharp slowdown in the economy, associated with weak real income growth and the tightening in the supply of credit, pulls inflation materially below the target.  On the upside, there is a risk that above-target inflation this year and next raises inflation expectations so that inflation persists above the target for a sustained period.  During the past month, the balance of those risks to inflation in the medium term has shifted decisively to the downside.  In the light of that outlook, the Committee judged at its October meeting that an immediate reduction in Bank Rate of 0.5 percentage points to 4.5% was necessary to meet the 2% target for CPI inflation in the medium term.

The stability the cuts were intended to bring was welcomed, however levels of confidence are there, but with an air of caution.

Given the measures outlined by the UK Government yesterday it had little impact on the reduction of Libor Rates, with 3 month Libor set yesterday at 6.27125% compared to 6.27875% on Tuesday. It is hoped that yesterdays further announcement will ease the spread between Base Rate & 3 month Libor. Only time will tell, but we don't anticipate that we will see drastic falls in the sort term.

Sterling is suffering at the moment as a result of the gloomy economic forecasts for 2009, loosing ground against both the US Dollar & the Euro, this morning trading down under 1.74 & 1.27 respectively.

Another currency currently suffering the effects of the concern over the Global outlook has been the Australian Dollar. Yesterday their Labour Market showed further signs of weakening with a rise in unemployment, coupled with the global economic downturn the RBA are expected to cut interest rates further in the coming months. This morning the Australian Dollar is trading above 2.47 against sterling.

Following the same global outlook commodity prices are also suffering, with the price of Oil showing further fall's,however  we await to see this feed through to the pump prices.

The HBoS House Price Index data released earlier today shows further falls in UK House Prices, albeit the fall was less than expected at 1.3% against an anticipated 1.7% fall. Continued fall's in house prices has increased affordability, however given the lack of mortgage availability & deposits required, first time buyers are still not able to take optimum advantage of the current situation.

With HBos & Nationwide indices both matching each other in the rate of decline, our Economists are indicating that both are likely to show a fall of 25% from the peak to the bottom, prior to any recovery.

Further data out today comes from the US with the initial jobless claims & Wholesale inventories, which are both expected to show further weakening of the US economy.

Hazel Wilkinson| Treasury Solutions | nabCapital

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