Currency Update – Thursday

It shows the esteem that M&S are still held in, when comments from their board about hard times ahead manage to not only hurt their own shares but hurt others in the market, as 10 of the 15 stocks that fell by more than 5% yesterday were exposed to the consumer retail market. The broad decline in stocks, and news that construction sector declined at it’s most rapid pace in over 10 years, hurt the Pound sending it lower against a broad range of currencies. Against the Euro it fell below 1.2550, as the single currency was boosted by comments from Trichet who warned that ‘there is a risk that inflation will explode’ if the ECB didn’t act decisively, which they will do today, by raising rates by 0.25%.

Trichet’s comments helped the Euro climb to a 10 week record high against the US Dollar, as the ADP employment report came in much weaker than expected. The report is basically an advanced guess of what the non farm payrolls will be, but recently the report has had only an erratic link with payrolls; however the market does still pay attention to the numbers, so when they came in at  -79k, against expectations of -20k, then the Dollar suffered. Oil climbed again to over $144/bbl, which further weighed on the Dollar allowing the Euro to climb to just under 1.59. The employment report also helped limit some of the Pound’s losses against the Dollar, which after falling below 1.99 wasraised above this level, although it was only short lived as overnight Sterling has slipped back below 1.99.

Australia has had retail figures realised, and just like the UK’s, the strong figures are being treated with suspicion. A rise of 0.7%, is likely to be more down to higher food prices boosting the figures, with actual volumes remaining flat. However the markets still reacted pushing the AUD 1% higher against the US Dollar, although of course this was also affected by the US employment woes, and the Pound fell almost 2.5c against the AUD to around 2.0650 . If the data did represent a real growth in retail volumes, then it would present a risk to the RBA’s view that rates are high enough to contain inflation, however with the figures likely skewed the central bank will not be too worried.

A day earlier than normal due to we have the non-farm payrolls; after yesterday’s ADP report the expectations for the payrolls figure have been downgraded and the consensus is now for a fall of around 60k. This is still far from the numbers from the last US recession, which averaged about a 120k fall per month, but downward revisions to previous months are still likely to present a downward risk to the US Dollar.

We also have the ECB decision today, as mentioned, many times, they are almost certain to raise rates by 0.25%, but it is the press conference afterwards which will be watched closely. Trichet is likely to be broadly neutral and further rate rises will be dependant upon the pace of wage demands and further sings on inflation.

In the UK we have already had the UK services index, which shows the sector falling by it’s sharpest pace since the survey began (12 years). The numbers further put the economy onto the path to recession, and with inflation remaining high, the MPC cannot cut rates as they would like to. The bleak figures have depressed Sterling sending Sterling down to around 1.25 against the Euro and towards 1.9850 against the Dollar.