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

Tuesday August 21st 2007 By Jonathan Mealey - Senior Executive Dealer

Hurricane Dean Picks up pace, but the currency markets calm down. Yesterday saw the residents of Jamaica having to cope with the effects of hurricane Dean sweeping through their country causing devastation to towns and buildings alike as well as claiming lives. The currency markets have just come out the back of a storm last week and as the dust settles it was a fairly quite day on the currency markets. Sterling strengthened marginally against most major currencies yesterday as broad gains in global stocks and calm across all financial markets gave investors confidence to move back into the highest yielding currency out of the G7. Data that showed another strong rise in British house price inflation in July was generally ignored, as investors' focus stayed firmly fixed on credit, liquidity and carry trade issues. "It's been a bit of a directionless day, and I wouldn't be surprised to see that continue in the short term as everyone treads water and waits to see if things calm down," said David Jones, markets analyst at CMC Markets in London. In early afternoon trading the pound was up 0.3 percent on the day versus the dollar and the euro was down 0.2 percent against the pound. Sterling was up 0.6 percent on the day against the low-yielding yen. With the highest interest rates in the Group of Seven industrialised nations at 5.75 percent, sterling benefits from the carry trade when investors borrow low yielding currencies like the yen to invest in higher yielding assets House price inflation in England and Wales picked up to an annual rate of 12.8 percent in early August from 10.3 percent in early July, property website Rightmove said on Monday. Official data on Monday showed that Britain's public finances swung dramatically into the black last month as robust tax receipts helped government coffers record their biggest ever surplus for a month of July. The public sector posted a net cash repayment of 13.1 billion pounds last month. This beat forecasts for a reading of 11.0 billion pounds and was the biggest repayment for a month of July since records began more than 20 years ago. The government's preferred accruals based measure, which is less volatile than the cash measure showed a surplus of 6.5 billion pounds. This also beat forecasts and was a record for July. These figures are useful to sterling as investors look for other reasons to support sterling as a rate hike now looks unlikely. So in this time of supposed calm there couldn’t really be a better time to look at the outlook for some of our more popular currency purchases.

GBPUSD Last week there seemed to be no let up in news of sub-prime related problems, which led to a sell of in stocks and a flight to safety even as central banks injected funds into the market to calm fears of a credit crunch. The dollar benefited as investors repatriated funds to the US, closed out US stocks for dollars and as many viewed the steadying dollar as a safer place to put their cash. Data also helped; with of note in particular stronger than expected July retail sales data and July producer prices. Then on Friday, just as we were thinking the week could not get any crazier, the Federal Reserve cut the discount rate from 6.25% to 5.75% to try and improve liquidity. Many market participants took the Fed’s actions as a sign that the Fed could cut the Fed funds rate at the next meeting on 18th September. So what’s the outlook? There could be further pressure on sterling over the coming weeks even if we see a rebound on the US Fed discount rate cut news. However, are you prepared to risk it? Historically any rate above 1.90 is a great rate on the dollar; why not contact your account manager today to take the risk out of the market?

GBPEUR Many took the large injections of funds by the ECB last week as a sign that the central bank thought there may be more trouble ahead. Expectations of a euro rate hike in September have been slashed, despite Trichet giving his usual pre-emptive rise signs, as the market turmoil led many to think the central bank will rethink its current outlook on the Euro zone. The outlook for GBPEUR is a lot less turbulent than the other currency pairs at the moment. Longer term prospects favour the pound, but in the shorter term the higher yielding pound could suffer more. Contact your account manager to find out more.

GBPCAD Canadian data points to the economy growing strongly and more importantly above optimal levels, which will continue to provide upside risks to inflation, and hence may force the BOC to react. So how do last weeks developments affect the loonie? Well with volatility so high and every day bringing a new development to this credit crisis, it would be unwise to even predict where the loonie will be at the end of this week. However, longer term the loonie looks strong because as we have seen economic data is still strong and supportive of an interest rate hike. Think about getting in now if you have a CAD requirement.

GBPAUD New 2 1/2 year high. There is no doubt this week will remain in the memories of all who were involved in the markets and especially the ones that once were involved in carry trades. Serious volatile trading, with a heavy sell off in global equities dominated the headlines. A selling frenzy on global markets amid persistent credit concerns and carry trades were hit hard. On Thursday the AUD surprised the market, coming off massively against a basket of major currencies, amid heavy carry trade liquidation. Overall, the AUD lost almost all gains made against lower yielding currencies this year so far in just 2 days. It is very hard to say where the aussie will go in the near term, but there is no doubt that the Australian economy remains robust, with stable growth and tight labour market, so may well strengthen again in the medium to long term. So while there are bargains to be had grab them with both hands. GBPNZD A similar story to the aussie here with massive sell offs in carry trades the NZD weakened massively over the course of last week. Get in now while the going is good. With such volatility in the market it is vital you stay in contact with your account manager there are great savings to be made in the currency markets at the moment, but it all comes down to timing. Be well informed and ready to move. You know the number give your account manager a call today on 0800 328 5884.