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Weekly Market Update 06-05-2011

Weekly Market Update 06-05-2011

Old May 9th 2011, 2:40 pm
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Default Weekly Market Update 06-05-2011

A very busy week for economic data and interest rate decisions.

GBPEUR high of 1.1280 and a low, a 13-month low of 1.1050 2%

GBPUSD high 1.6730, close to the high from last week, the highest since Dec 2009 and a low 1.6380 2%

EURUSD high 1.4940, highest since Dec 2009, low of 1.4515, just shy of 3% movement.

GBPAUD high of 1.5520 and a low of 1.5120, a new low for 2011 and a fresh 26-year low 2.5%

GBPNZD high of 2.10 and a low of 2.05

GBPCAD high of 1.5950 and a low of 1.5650 2%

GBPCHF high of 1.45 and a fresh all time low of 1.41

Beginning with the currency we’re all most familiar with the GB pound. This week we hit the ground running with economic data with the Manufacturing, construction and service sectors numbers for April. These all confirmed what a lot of analysts had feared that the levels of activity seen in the first 3 months of the year were largely due to the heavily disrupted 4th quarter of 2010. Activity levels across the 3 main sectors of the economy all slowed to around 54, from circa 56. so there’s still growth, the pace is slowing. House prices also declined last month according to Nationwide. So is there any reason to be cheery, well if like me you fell in love with Kate Middleton on Friday as she said the words I do to a prince, then not really. It isn’t all doom and gloom, as the Bank of England chief so regularly reminds us, the recovery will be choppy so some months will be better than others. The result for Sterling was slip across the board. This merely reinforced expectations that the Bank of England aren’t going to hiking interest rates any time soon. The latest I’ve seen in the forward market for overnight interest rates is a hike in January is priced in. That’s a big change from an expected increase in May that was still the case up until March.

Moving on to the Euro, one of the best performing currencies of late. Up around 3.5% against the Pound and 8.5% against the Dollar ytd. As hopefully you’re all aware, the story here is one of an increasing yield. There are two/three key reasons why a currency tends to appreciate as a result of interest rate increases:

Increase yield or return if you buy that currency
Generally a sign of economic strength of the country/countries of that currency
Expectation that the underlying asset will increase in value

Quick look at the numbers out this week from the EZ, interestingly a lot of people talk about the EZ economy looking weak but as a whole it’s doing quite well. Equivalent surveys for economic activity to the UK were all stronger, albeit largely due to Germany and France. Retail sales did fall more than expected but it did little to prevent the one way bet that was being built up. The key event for all market participants was the ECB’s press conference, there were no expectations that rates would be increased today, just simply that as in March’s meeting, they would signal another move at the next meeting in June. They failed to meet this expectation or use certain key language such as “strong vigilance” and “prepared to act in a firm and timely manner”; they reiterated that they will “continue to monitor very closely all developments with respect to upside risks to price stability,” this was somewhat ambiguous and the Euro suddenly became a big sell, dropping 2% versus the Dollar and even 1.4% against Sterling
This just goes to show that when a currency looks like a one way bet, that’s usually the time to get before everyone else does!
This is especially important to highlight to clients with so many currencies at near record highs or multi-year highs against Sterling and an ever increasing number of clients who are moving funds back from overseas into Sterling.

Usama bin Ladens execution has brought about concerns that there are going to be significant reprisals. This is part of the story with the general weakness seen in the commodity based currencies and the strength in the Swiss Franc.

Finally, the non-farm payrolls data is due out today with expectations placed for an increase in jobs created of around 180,000

Andy Scott
Premier Account Manager
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