20th November 2009
Daily outlook
Investor caution drove the US dollar higher across the board yesterday as global equity and commodity prices came under sustained selling pressure. Renewed concerns over the health of the global banking sector were behind the decline in market sentiment as the news broke that Japan’s largest bank, the Mitsubishi UFJ, is seeking to raise $11bn in capital through a rights issue.
Also weighing on markets was the separate news that public sector net borrowing in the UK had hit £11.42bn, or 59.2% of GDP – the highest level since records began. Consequently markets ignored the more upbeat assessment of the global economy from the Organisation for Economic Cooperation and Development (OECD). The OECD has more than doubled its worldwide growth forecast for 2010 from 0.7% to 1.9% although the OECD also warned that recovery could be bumpy.
In reference to the UK, the OECD questioned the effectiveness of the Bank of England’s asset purchase scheme and also the size of the UK’s public debt, stating that the British policymakers needed to come up with concrete plans to reduce the burden as soon as possible.
With little in the way of economic data due out today, most analysts believe that currencies look set to trade within recent ranges as markets head in to the weekend.
- Euro Zone
Germany – Producer Prices (Oct)
Italy – Industrial Orders (Sep)
Currencies outlook
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Sterling
The pound continued to lose ground on Thursday after beginning to fall away during Wednesday’s afternoon session. Monetary Policy Committee member, Paul Fisher, said the Bank of England is keeping all options open the scale of its quantitative easing programme. Official data did not help matters as the Office of National Statistics (ONS) showed that retails sales rose less than expected at 0.4% in October. Despite September’s figures being flat, the headline number was still below the 0.5% expected. However year on year the figures were higher increasing by 3.4 percent. Government finance data was released around the same time to the pound’s detriment. Public sector net borrowing reached 11.42bn last month, almost double market expectations and the highest level of borrowing for the month of October since records began in 1993. The ONS also said that public sector net debt as a percentage of gross domestic product (GDP) totalled 59.2 percent in October. This figure marked another unwanted record for the UK as it was also the highest since records began in 1974/75. A report from Organisation for Economic Co-Operation and Development (OECD) urged the government to tighten spending sooner than they have planned too, as they feel this would strengthen Britain’s recovery from recession. The OECD report forecasts growth of 1.2 percent next year and unemployment rising to 9.5 percent. On the contrary the Bank of England forecast for growth is 2.2 percent and the Treasury has it at 1 percent. Regardless of predictions, the UK remains the only major economy still in recession. There is no significant data released today leaving the pound subject to external influences.
US Dollar
The US dollar benefitted yesterday from investor caution, rising against both the euro and the pound. The retreat from risk appetite was mirrored pretty much across the board with both equity and commodity prices slumping worldwide. Analysts have attributed this renewed caution to soft economic data released over the last seven days which has once again raised question marks over the strength and sustainability of the global economic recovery. Yesterday’s American weekly jobless claims served to highlight these doubts with the number of continuing claims rising to over 5.6m. The weak labour market, and its potentially negative impact on consumer demand, remains the principal cloud hanging over the world’s largest economy, and many economists fear that growth will inevitably peter out unless employment conditions improve. There was better news from the Philadelphia Fed’s manufacturing survey which again showed improvement. Nevertheless, given that the rise was less than last month’s and that it was also in line with forecasts, markets remained unmoved. With no key economic data due out today, trading in the US dollar could well remain within recent ranges as we head into the weekend.
Euro
The single currency rose against sterling but lost ground against the US dollar on Thursday as risk aversion once again weighed on financial markets. A worldwide decline in both commodity and share prices sparked the return to caution although comments from ECB chief, Jean-Claude Trichet, also weighed on investors’ minds. Trichet stated that whilst the European Central Bank would proceed with a gradual withdrawal of the unconventional policies adopted to support the financial system, it was far too soon to put concrete exit strategies in place. These comments underlined many economists’ concerns that growth remains fragile. Similarly, markets begin today’s session with a warning from the German Finance Ministry that growth in Europe’s largest economy could slow during the final three months of the year. Germany officially exited recession in the second quarter of this year by posting 0.4% growth before expanding again by 0.7% in Q3. However, the Finance Ministry today expressed its concern over the potentially damaging impact that the strong euro could have on German exports. Today sees the release of German Producer Price data for October.
Japanese Yen
The yen was one of the main winners alongside the US dollar on Thursday as risk appetite came to halt and traders started to unwind carry trade positions. The main focus in Japan during the overnight session was the Bank of Japan’s (BoJ) monetary policy meeting. The central bank kept interest rates on hold at 0.1 percent, with the view that low interest rates will support the economy. This was followed by comments from BoJ Governor, Masaaki Shirakawa, who said that “there is no big gap in the view of the central bank and the government that the country is experiencing sustained price falls”. From a market perspective, the interest decision came as no surprise and, as such, did nothing to derail the Japanese currency’s advance as investors funnelled funds into safe haven yen positions. Next week starts off slow with Japanese markets closed for the Labour Thanksgiving Day Bank Holiday celebrations on Monday. The highlights all come later in the week with the release of Japan’s trade balance, followed by CPI figures and the unemployment rate rounding things up.