The currency blog

Yesterday the spotlight was firmly on the Bank of England minutes in the morning and onto the Fed beige book in the afternoon. The BoE minutes cheered sterling into a rally against the USD over 1.66 and to 1.11 against the euro. The tone from the BoE although not conclusive was more hawkish and importantly there was no mention of expanding the Quantitative Easing programme. This facet was the impetus behind sterling gaining across the markets. In addition there is ongoing interest in GBP/USD by an oil company who are touted to be buying as much as £500 million each day supporting the rally to 1.66.

Yesterday afternoon we finally saw a breach of 1.50 for EUR/USD; however it did not last long as the Fed beige book release brought a sense of reality back into the markets. The disappointing feedback from the Fed beige book which offers a survey of economic conditions led to a dip in the Dow and some strength coming back into the USD in later trading. The feedback suggests that the economic recovery in the US could be prolonged and shaky.

Today UK retail sales data came in lower than expected with month on month sales coming in flat against the expectation of a 0.5% rise. This has taken the shine away from sterling after an impressive rally over the last few trading days. Currently the pound although dipping on the news is still above 1.10 on the euro and 1.65 against the USD and 150 against the Japanese Yen. Tomorrows GDP will now be the focus of attention for sterling.

Last night Mervyn King made a speech in Edinburgh and did not mention an expansion of Quantitative Easing; this morning the released minutes from the MPC showed a vote of 9-0 to keep rates at 0.5% and QE at £175 bln. Therefore recent developments were not enough to justify immediate change to rates or QE and evidence suggests that QE’s effect on asset prices “had been substantial” and of the type planned. Although the MPC indicated that in the November meeting QE will be looked at, this feedback has given the market confidence that no expansion will now be undertaken and hence sterling has rallied…

Feedback from the retail sector and the GDP data on Friday will give further clues to the health of the UK economy and good numbers could push GBP/USD and GBP/EUR higher still.

The USD is still under pressure as Chinese Industrial Production was rumored to come in much better than expected; the theme is a recovering China is the pre-requisite to a recovering global economy.

Key levels now to breach are 1.66 on GBP/USD and still 1.50 on EUR/USD. We have feedback from the US economy later in the form of the Fed beige book.

Recently, the National Police (Policia Nacional) in a report released some encouraging figures in terms of the overall crime rate in Marbella and the Malaga province. The report stated that the police efficiency has improved this year from 32 to 38 per cent while the number of arrests made, was around 5,623 in comparison to 4,736 from the previous year.

The report also added that the general crime rate in Marbella has more positive statistics than the provincial reports, as the popular resort town has recorded a fall of crime rate by 11 percent this year while Malaga in general has been around 5.5 percent. There have been however an increase in the reports of crimes made to the police, but subsequently the competence of police in resolving many cases, counting the number of arrests has also increased significantly.
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The prevailing market sentiment is for a weaker USD and EUR/USD is driving towards a key barrier option at 1.50 and the pound is piggy backing on USD weakness to push up to the 1.64 levels. The pound is targeting the support level of 1.6450 and a breach of this should open the door to test 1.66. USD weakness is continuing to ensue on the improved confidence in equities and the appetite for risk catalysed by the Dow Jones breaching 10,000 and further boosted by a decent run of US corporate earnings data most notably through Apple.

This week we have data snaps from the UK and the Eurozone which will be closely watched. For the UK the Bank of England will be looking closely at economic data; better than expected UK retail sales data on Thursday and GDP on Friday may comfort the MPC not to expand further on QE. We have Mervyn King speaking tonight and the Bank of England minutes tomorrow which may shed more light on the Bank of England’s current thoughts. The thoughts on the expansion of QE are what will potentially move sterling higher or lower in the short term. For the Eurozone this week will be a good indicator on whether the pace of recovery is receding. The most important economic releases to watch this week will be German producer prices, Eurozone current account numbers, German IFO report and PMI figures from the entire region. If we see disappointing numbers then this could signify that the recovery is losing traction as was largely stimulus led- this could then take the shine from the euro.

Finally the Australian dollar remains buoyant and the minutes from the Reserve Bank of Australia have indicated that inflation control is their priority which opens the door for further imminent rate hikes and further AUD strength.

We ended last week looking more positive for the beleaguered pound which gained against both the euro and the USD from a poor start to the week. We are getting mixed messages on Quantitative Easing and the possibility of expanding the programme further; the pound gained following a report in the FT that the Bank of England may hold back from extending QE as it felt the economy ” was in good shape”

However this morning we are again on the back foot as Sir Howard Davies, director of the London School of Economics, said that Britain faces a dangerous rise in the levels of public debt- even inclusive of proposed tax increases…depressing! The article reported in the Telegraph went on to suggest that the government is running out of weapons to fight the crisis and the fall in the pound which should boost exports has been fairly benign and he added that “The pound never stops where you want it to,” indicating a possible run on the pound.
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Overnight comments  from the Governor of the Reserve Bank of Australia, Glenn Stevens will only serve to underpin the currency. The Dollar now appears firmly on course for a stronger period after Mr Stevens agreed that the Australian economy’s strength could drive it “way up” to US$ 1.10 to 1 AUS$ and further suggested that the Central Bank would not be “too timid” in further increasing the official interest rate. Money markets are now firmly betting that interest rates will be at 3.75% before Christmas with a strong feeling that we could now see a 50bp hike following their November meeting.

Other than the numbers from Citibank yesterday, the US Corporate earnings released yesterday were overall positive but the divergence between the releases from Goldmans and Citibank highlight that the decision is still pending with regards to the US recovery. This if anything has held the Dollar back more than the shift into riskier asset classes. The US Central Bank’s own Mr Fisher added to the air of unease when he said that he didn’t think that the US Treasury’s asset purchase programme had really done much good and that he was glad it was now complete.  Fisher isn’t a voter at the November 4th meeting, so if there’s discussion of whether to extend the scheme he won’t be part of the final say. Still, it’s interesting to see members not convinced of its benefits. It looks increasingly likely the Fed will pause here to see how the Treasury market performs without its support.
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