Currency market updates - from Foreign Currency Direct (www.currencies.co.uk)

Tuesday October 9th 2007

By Edward J Bianco - Financial Controller

UK

It is likely the recent hiatus enjoyed by sterling whilst the dollar languished is soon to come to an end, once again UK domestic and US global factors are at the pre-eminent issues for of our clients trading, whatever the currency.

Just as the market and people’s focus appeared to be drifting from old news it looks increasingly that Northern Rock will remain the hot potato over the coming weeks.  Northern Rock’s weekly accounts show that the Bank of England loans have topped an incredible £10bn to date.  Whilst an unelected Gordon Brown remains vulnerable in any economics debate the uncertainty surrounding the country’s mid term political leadership is also likely to erode sterling value.  At present the government appears to be trying to carry favour by making public ministers attempts at strengthen the protection available to private individuals, and their bank balances, by raising the automatic repayment threshold.

It remains of considerable concern that theses headline grabbing efforts whilst populist may well be naively conceived.  After-all should a lender responsible for one fifth of the UK’s mortgages become insolvent the burden placed on the Bank of England to support their poor short-termist borrowing practices would be considerable and relief funds must be released from elsewhere.  More importantly Northern Rock is not affected in isolation so the factors which may lead to their decline will also be affecting others and the Government will find it difficult not to be consistent in its application of any financial guarantees.  As Northern Rock smoulders in the back ground the pessimists will be looking to seek the root of future fires.  Should the position worsen further we may expect to see sterling lose considerable value over the coming months.

Prospects of an interest rate rise to improve sterling strength and counter negative news looked to have diminished further as the Office for National Statistics stated input prices for the year to September stood at an inflation busting 6.45% putting pressure on UK manufacturing and slowing the economy as a whole.  "These figures are a touch stronger than expected and there is nothing here that suggests the Bank of England will cut rates in November," said George Buckley, an economist at Deutsche Bank.  In support of this news the National Institute of Economic and Social Research said UK GDP grew by a slowing 0.7% in quarter 3 compared to 0.8% in quarter 2.

This is in contrast to retail sales figures for the year to September which show growth of 3% according to the British Retail Consortium.

USD

The popular saying remains that if America sneezes the UK catches a cold which makes it highly likely that whilst both currencies may decline sterling may fall further and faster.  So just how bad is it currently in the US well one indicator it may be time to reach for the Beechams Cold Capsules is homelessness in the US, Julia Kehoe, commissioner of the State Department of Transitional Assistance has said of the level of homelessness in the US , “I think what we are seeing here is a perfect storm,"

Initial optimism that US employment figures weren’t as bad as expected have been dampened on further investigation, it appears that the US governments own recruiting may well have been to blame for a significant part of the uplift.  To add further pressure the cost of Brent Crude dropped yesterday by over 2% a barrel as investors remain concerned that the global credit crunch will lead to a deep rooted recession and that the US National Hurricane Centre said on Friday it does not expect any more tropical cyclones or hurricanes this season to restrict oil supplies. The news weighed on oil as it reduced the chances of future supply outages.

Euro Zone

Tilting at windmills the European Finance Ministers believe they have a solution to the crisis and it rests in the Far East.  The G7 European Finance Ministers (for RGH – Canada, France, Germany, Italy, Japan, United Kingdom, United States of America) currently represented on rotation by Luxembourg's Prime Minister and Finance Minister Jean-Claude Juncker believe that a world crisis can be averted if the the Chinese allow their currency, the  Yuan to roam freely, currently it’s exchange rate is highly restricted.  They beleve this would allow the dollar to regain significant strength which in turn is in the global market’s interest.

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