The currency blog

Sterling for once is the star of the show. A large Eur/Gbp sell order from a UK clearer kicked things off this morning, followed by a report in the FT that the BoE may hold back from extending its QE program as it felt the economy “was in good shape”. It now waits to be seen if this is just a rally in a downward trend for Sterling or potentially the start of a concerted rally.

The dollar again fell following the release of the minutes from the most recent Federal Reserve’s policy meeting. The minutes had a distinctly dovish tone to them, they indicated that just one member had advocated a reduction in the buying of financial assets, with most of the committee favoring an increase in Fed purchases in order to speed the economic recovery. The overall tone was cemented when the discussion turned to the outlook for inflation with the suggestion being that the Central Bank is still a long way away from raising its interest rates. The Dollar fell sharply to near 15 month lows against the Euro, touching 1.4970 The Euro level is particularly interesting, with 1.4950-70 range having proved particularly Dollar supportive in the past (during the 4th Qtr of 2007) but upon breaking, the rate rushed up to just under 1.6000 where it remained for some time before falling back. Technical analysts are targeting 1.5700 as a near term objective.
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Spanish law recognises both civil and religious marriages, but only through a proper channel of documentation.

With its rich history, culture, colour and natural beauty, a wedding in Spain is nothing but a dream come true for many couples. Spanish law permits foreigners to marry in Spain, but to jump over some of the legal hurdles - it is necessary for one party to have been a legal resident of Spain for at least two years.

The minimum legal age for marriage in Spain has been defined as ‘18’ for both boys and girls. The administrative procedure or requirements vary from region to region; hence it is recommended to ask the local authority for detailed legal requirements. Usually, it takes around 30 to 45 days to get approval of a marriage application.
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This morning, we have already had the UK employment data which was better than expected with a low claimant count reported, the lowest since May 2008. This has allowed Sterling to have a reasonably buoyant trading session so far however the data is far from convincing.

In the UK yesterday’s inflation number was weaker than expected, coming in at 1.1% y/y the lowest level for 5 years and completely eradicating any ideas of a surge in inflationary pressures for the foreseeable future. These numbers need to be read in conjunction with the contents of the speech given by Charles Bean yesterday within which he began to outline the Bank’s current thinking on Quantitative Easing. It is a popular pastime in trading rooms and other financial environments to try and derive an explanation as to how QE works and what the long term effects of differing withdrawal scenarios will be. Mr. Bean’s speech was therefore awaited with interest. He talked of various aspects of QE including the effect on the gilts market of a gradual retraction of stimulus and the resultant bottom line effect of the Bank reducing its APF holding by selling into what will become a falling market as supply outstrips demand. What he did not elaborate upon was the inflationary effect that QE would have on the UK economy and what the Bank would do to avert this possible problem. Yesterday’s numbers put this concern on the back boiler and reinforced the opinion that UK interest rates would remain at their present lowly levels for some time yet - hence the continued decline of Sterling on the international stage. Inflation hawks are however fretful over the near term, afraid that with the economy still looking sluggish, there is a very strong possibility that the BoE will extend the QE measure up to a staggering £ 200 billion. The aforementioned hawks would be very vocal in their concern and the probable column inches that resulted would be very unlikely to be Sterling positive.
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Plenty of Strong Economic Data Overnight from Down Under, the Far East and the UK with differing outcomes for the respective currencies. Starting with last first, we got some very strong UK numbers with the British Retail Consortium reporting like-for-like retail sales +2.8% year-on-year in September with total sales at 4.9% y/y (the components showing the best improvement since early 2008) and the RICS house price balance at +22 in September (against a consensus of +16) versus +10 in August. This figure was the highest since May 2007 and goes along with the increase in approved mortgages for homebuyers (as opposed to remortgages) reported by the Council of Mortgage Lenders. Did this help Sterling? Not a bit of it. The market preferred to concentrate on the big red numbers and the shortening time scale to do something about them for UK plc and kept up the selling pressure. The long term outlook for interest rates doesn’t help, neither do the recent short term projections for Sterling going into next year’s General Election. According to figures from the Chicago futures exchange, net short Sterling positions on the exchange jumped to a record level last week. Elsewhere, reaction to positive data was more predictable with reasonably strong numbers from New Zealand underpinning the Dollar and leading to forecasts of the currency out-performing on both a regional and global scenario by 7% next year. The Australian NAB business survey for September showed that confidence and conditions slipped a little from a strong recent showing although companies remain very upbeat and the results are still consistent with a robust recovery. Kiwi/Aussie cross trading might very well become a favourite trade for 2010.
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Sterling again takes the lead today as the “pound gets pounded”, It`s very difficult to put a forward a case for buying Sterling at the moment when so much negativity continues to undermine it. One thing to bear in mind is only the UK and US  have expanded their money supply by over 100 % in the past 18 months and both have interest rates at near zero. It’s no surprise then that both currencies are being used to fund positions in high yielding currencies, and will continue to remain under pressure in the coming months. Key levels to watch Gbp/Euro 1.0685 break this and we could see parity before the end of the year.

News over the weekend was a bit gloomy on the Sterling and Dollar front with continued talk of UK rates staying below 2% for some considerable time yet with the added prediction of the currency dropping below 1.4000 against the Dollar and to below parity against the Euro. The Dollar was similarly put on the back-foot by continued speculation of reserve divestment although The Times did sum up this scenario quite nicely by pointing out that talks amongst the Middle East nations on using Euro more has a target date of 2018 - as the paper says, ‘The Dollar is going to be around as the world’s reserve currency for a long time’. Other than that, the press was full of asset sales and other cash raising exercises, those going ahead, planned and speculated upon.

Economic news out of the UK this week in the form of unemployment data and CPI will hold the key to further moves; if it comes in better than expectations then you could see a strong oversold rally for Sterling. If it comes in below then the pound  really could  be in for a pounding.

Markets were seriously unmoved at the outcome of the policy meetings yesterday. In fact very little occurred until after we went home and really after most of New York had left for the day as well. At that point, Ben Bernanke told his audience that the Fed will tighten rates once recovery takes hold. This had more effect than comments from Trichet at his after meeting press conference although we did see the Euro dip a little when, in answer to a question about the currency being used to price oil trading, he stated that he is not actively promoting the global use of the Euro. Anyway the end result is that very little has changed from the beginning of the week with the Dollar looking soft and Sterling looking softer. With it being a long weekend for Japan, the US and Canada, it is difficult to see any fundamental change the current levels. The US trade balance looks to be the highlight for today but by then it might be too late to rescue the day as a trading session….
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