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

Thursday 30th August 2007

By Gavin Beale - Senior Executive Dealer

Currency Summary

Sterling showed a strong performance yesterday across the board, up by around 0.25% against the Euro and 0.8% against the US Dollar.
Other notable gains saw Sterling up almost 2% against the Japanese Yen and 0.5% against the Aussie Dollar.

Of course, recently we attribute the above average volatility in the Antipodean currencies largely due to the unwinding of carry trades. As mentioned in many reports over the last few weeks, a carry trade is the borrowing of money at a low rate and investing in a region where a higher yielding interest rate can cover the borrowing costs, plus some!
This has been very prominent in recent times, but the question of ‘why’ still remains.
At FCD we believe that the increase in number of Brits emigrating to Australia and New Zealand is reason enough to focus on what may seem like such a far-from-home issue.

Japanese Focus

Since the early 1990’s, Japan had been suffering from a recession, so their Monetary Policy Committee took the decision to cut interest rates to 0%. The reason for the recession was ‘deflation’ (falling prices) which meant that consumers and businesses were reluctant to spend or invest because any purchase was likely to be cheaper in the future.
The zero interest rate was designed to make it cheaper for consumers and companies to borrow money for spending, and less attractive for them to save, thus stimulating economic growth.
Since interest rates in Japan recently rose to 0.25, those investors who borrowed at 0% and had based their transactions given precise levels of interest, have had to sell back the purchased currency from their Yen loans. The mass sellback of course caused significant turbulence for any currencies involved as massive fluctuations allowed for a constant to and fro of buying and selling.

I’m buying Australian/New Zealand Dollars, what can I expect?

The truth is that in the world of currency, nothing is for certain. August has seen some serious movement for Sterling against the NZD and AUD and purchase levels are extremely attractive. Many clients of FCD managed to be lucky enough to secure exchange rates whilst at the peak, but for those who didn’t, levels are still holding. Caution should be taken however, as Japan held their interest rates this month as they see their economy starting to recover and gain momentum. Stability is possibly just around the corner and it’s highly speculative to assume that recent highs will not stay around for too long.

Global Stock Markets still volatile

The United States housing and credit ‘woes’ have continued to cast a shadow over the
Stock markets.
Analysts said that investors hoped the volatility on global markets would be eased if, as many expect, the US Federal Reserve cuts interest rates next month.
Weeden & Co strategist Steve Goldman said that the market is now: “getting closer to when the Fed will lower rates.”
Recent US Dollar weakness has largely been attributed to slowing stock markets as well as problems with the credit market and it seems that we are likely to see some sort of correction by the Fed in the not too distant future.

What to expect today?

This morning at 06:00 GMT saw the release of the Nationwide housing price index, later this morning we are likely to start seeing the results as markets start looking further into the implications of the results.
At 12.30 GMT the U.S Bureau of Economic Analysis will be releasing their thoughts on the GDP, this inflationary measure indicates the pace at which the Feds’ economy is growing or decreasing, previously at 3.4%.
The Bloomberg Retail PMI survey data is to be released for the Euro zone at 13.45 today. This will give an indication as to how consumer consumption patterns are moving; it indicates the direction of future demand. Previously at 46.2, any indication above 50 is seen as strong growth.