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Weekly Market Update 19-01-2011

Weekly Market Update 19-01-2011

Old Jan 19th 2011, 4:57 pm
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Default Weekly Market Update 19-01-2011

Figures out today show UK unemployment rose by 49,000 to 2.5 million in the three months to the end of November. One in five 16 to 24-year-olds are now out of work, after a rise of 32,000 to 951,000 without jobs, the highest figure since records began in 1992. Other data from the ONS showed that average earnings had risen by 2.1% in the year to November.

Yesterday, sterling extended gains, hitting an eight-week high versus the dollar after a surge in consumer price inflation fuelled expectations that UK interest rates may need to rise soon. Rising oil prices drove annual CPI growth up far more than expected in December to an eight-month high of 3.7 percent, data showed, well above the Bank of England's 2.0 percent target. Sterling was boosted as the figures added more fuel to speculation that the UK central bank may have to raise rates -- which have been chained at a record low 0.5 percent -- as early as May. UK money markets, which last week priced in around a 50 percent chance of a UK rate hike in May, were pricing in a 75 percent chance of a move by then after the data. Higher inflation deepens the dilemma of the BoE, as a rate rise in the near term may choke off the country's economic recovery, particularly as the impact of government austerity measures is expected to kick in this year.

Many analysts argue that the BoE is unlikely to raise rates in the coming months, which could further worsen its market credibility as price risks ratchet higher. The central bank suggested it would stay put on rates despite rising prices, with Paul Fisher, the BoE's executive director for markets, saying in a newspaper interview that the bank must not get too concerned about short-term inflation.

The recent VAT rise from 17.5% to 20% could further fuel inflation, which has now remained above the 2% target by one percentage point or more for 13 months. The Bank should stand firm against temporary pressures such as the VAT rise, it says.

In its 2011 UK economic review, it says it expects GDP growth this year and next of just 1.5%. However, the more-optimistic Item Club forecasts UK GDP growth of 2.3% this year, rising to 2.8% in 2012.

The euro has risen sharply, despite signs that governments are in no rush to increase the Eurozone rescue fund. The single currency gained more than a cent against the dollar on Tuesday to about $1.34. Meanwhile, an agreement is emerging over the terms of a much tougher round of stress tests for European banks, to be conducted later this year.

Rising fuel prices helped push annual Eurozone inflation up to 2.2% in December, from 1.9% in November, according to official figures. Consumer prices in countries using the euro climbed 0.6% on a monthly basis, Eurostat added. The data comes one day after the head of the European Central Bank (ECB) warned the region was threatened by rising prices. The ECB has a target of 2% for Eurozone inflation. A year ago it stood at 0.9%. More expensive fuel has a particular impact on the cost of transport and of food production and delivery. Overall energy prices jumped 2.3% between November and December, leaving prices 11% higher in December 2010 than in the same month in 2009.
The euro built on Tuesday's gains, when a strong German ZEW business sentiment survey, added to positive sentiment from last week, when comments from European Central Bank head Jean-Claude Trichet on near-term inflation pressures sparked talk of an earlier-than-forecast rate rise.

Markets brushed aside euro zone debt worries and rising peripheral bond yields for the time being as the euro's favourable interest rate differentials over the dollar encouraged investors to keep pushing it through key levels.

Range of the week: 1.1762 – 1.2045
Variance of the week on £10k €283

US retail sales rose in December for the fifth consecutive month, driven by holiday season demand, official figures have suggested. Sales grew by 0.6% last month compared with November, according to the US Commerce Department. The increase lifted the annual sales total up 6.7%, the largest annual increase since 1999.

Meanwhile, the Labour Department said December consumer prices rose by 0.5%, the largest increase in 18 months. About 80% of the increase was due to an 8.5% rise in petrol prices. Core inflation, which strips out volatile fuel and food rises, was up just 0.1% in December.

Range of the week: 1.5580 – 1.6060
Variance of the week on £10k $480

A sell off of the Aussie Dollar during Asian trade yesterday saw the currency weaken briefly, however support held strong limiting any significant moves.

The view on the Australian Dollar seems very mixed as traders try to weigh the advantage they hold in terms of interest rate yield against the risks posed by the flood related drop in Australian output and the slowdown that the Chinese authorities are trying to induce. At the moment, the Aussie and Kiwi dollars are managing to avoid a collapse but that is not to say it won’t happen. I tend to think we will see another period of strength in these currencies before any major decline.

Range of the week: 1.5730 – 1.6080
Variance of the week on £10k $350

New Zealand
NZ inflation data is due for release this evening and any reading above 2.3% will be positive for the NZ Dollar because the reserve Bank of New Zealand has the capacity to raise interest rates to temper inflation; a luxury the Bank of England seems not to have.

Range of the week: 2.0480 – 2.0785
Variance of the week on £10k $305

The Bank of Canada’s decision to leave the base rate on hold at 1% was greeted with a selloff in the currency. The BOC made it quite clear that there was little chance of an early hike in interest rates and spoke in very measured tones about the uncertainty of the global recovery and the damage that the very strong Canadian Dollar was doing to export income. Sterling failed to push above recent ranges against the Canadian Dollar but is near the top of the range this morning.

Range of the week: 1.5370 – 1.5885
Variance of the week on £10k $515
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