The currency blog

Yesterday markets opened on a positive tone buoyed by Mubarak’s resignation in Egypt and upbeat macroeconomic figures in China, which boosted shares of the commodity sector. However, dollar performance was mixed during the Asian session overnight with losses incurred against the euro, while further gains were made versus the yen. There were no major data releases in the US overnight, but today should be more eventful with Retail Sales and TIC Long-Term Purchases figures both due to be released. A disappointing headline print of retail sales could knock the dollar and Treasury yields lower.
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With Chinese New Year and a lack of new data releases, last week turned into a bit of a non-event for currency markets. But with the exception of today (where the only thing of interest is the meeting of European finance ministers’) the rest of the week will very busy, especially for the Pound. On Tuesday, figures will reveal just how far from the Bank of England target inflation actually is. This is the first month that will include the recent VAT rise, with CPI expected to hit 4% and RPI (which I think is a better gauge of the inflation rate experienced by you and me) through 5%. Up till now, for a great many people, it has difficult to distinguish between 2 or 3 per cent inflation. In my opinion, a 5% rate is psychologically important and will push the BoE into action much sooner than people expect. The bank minutes are due for release next week, which will show how many members voted for a rise this time around, but on Wednesday the quarterly inflation report will detail their outlook for inflation over the coming months. The key point will be if the Bank thinks that current inflation levels are temporary (their current thinking) or that it is more permanent in nature and we will probably be able to guess the voting preferences from the report.
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More of the same yesterday with little data and a lack of unexpected news releases. The old favourites are coming to the fore again, global political unrest (currently Egypt), a widening in Eurozone bonds spreads (between Germany and the rest of the Eurozone) and an ongoing reassessment of risk appetite (Global Central Bank desire for monetary tightening). Even following yesterday’s decision by the MPC to leave rates and asset purchase size unchanged, some of the market still expect the committee to push for a rate rise by the May meeting, making the UK the first of the Big 4 to start pushing official rates higher. This has left Sterling underpinned in the immediate term, but any strength I still feel is likely to be short-lived.
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With little data of note out yesterday, this left the stage clear for US Federal Reserve Chairman Ben S. Bernanke’s speech to the House Budget Committee.  Bernanke explained that the unemployment rate is likely to remain high “for some time” despite the biggest two-month drop in the jobless rate since 1958. Whilst the fall in the jobless rate in December and January “do provide some grounds for optimism,” he warned that “with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level”. Bernanke and the Federal Open Market Committee are waiting for further proof of a durable pickup in the job market as they press forward with their plan to buy $600 billion in Treasury securities to boost the pace of recovery. In its January 26th statement, the panel said the recovery “has been insufficient to bring about a significant improvement in labour market conditions”. Bernanke’s remarks, his first since a Labor Department report on February 4th showed the jobless rate unexpectedly fell to 9 percent in January, were similar to remarks he gave last week at the National Press Club and testimony last month to the Senate Budget Committee.
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It was a fairly quiet across the markets yesterday, but the day started with a big surprise as UK Chancellor George Osborne announced a hike in his special tax on banks. Mr Osborne plans to raise an extra £800m, but with the deal announced just days before bank bonus season begins in the city, political rather than economic reasoning seems to be governing motive behind the announcement. Sterling reacted by falling all day against the Dollar and Euro, and the theme looks set to repeat itself and follow the line of least resistance after disappointing trade balance data earlier this morning and the lack of any clear direction going into the Bank of England rate decision tomorrow. Rumours of a symbolic rate hike by the Bank are swirling (as they do every month) but one would expect Sterling to already have reacted if there were any substance to it. No change to rates and the QE program is the widely expected announcement and with the bank wheeling out the Hawks last week for a media offensive on inflation expectations, one would think they would wait to see if this has had the desired effect rather than shocking the markets with a rate hike.
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A lifestyle in Spain still retains all the attractions sunshine, lifestyle; however the troubles with the Spanish banking system have removed some of the sparkle.

A positive is that measures have been taken to merge some of the savings banks; both large and small have been strengthened by their respective mergers. We are still seeing a number of clients that wish for a life in the sun and the increased positivity from the financial institutions is aiding their purchases.

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