Market Commentary, Dec 5, 2008

After The Lord Mayor’s Show

it would be quicker to list the nations that haven’t fiddled with their interest rates this week. We would be left with Japan (who haven’t got any scope to cut rates left) and the US who are expected to cut rates by 25 basis points at their next FOMC meeting on 16th December.

it would be quicker to list the nations that haven’t fiddled with their interest rates this week. We would be left with Japan (who haven’t got any scope to cut rates left) and the US who are expected to cut rates by 25 basis points at their next FOMC meeting on 16th December.

Suffice to say that although the ECB and MPC cut rates by the expected magnitude, the perception was that both could/should have done more. For the UK, if the BoE are determined to cut rates until ëreal interest rates’ become zero and inflation is falling fast, then why wait – just cut ! And with the ECB, they appear intent in lagging behind the fall in inflation. if estimates are right then Euro rates need to be down to 1.50 – 1.75% by the spring.

Sterling bounced a little after the decision but the gains evaporated overnight. With the positive yield differential strongly in the Euro’s favour, there does appear to be an increased chance of seeing ongoing Sterling weakness during the 1st qtr 2009.

Yield curves remain positive and with the manner that Central Banks are adjusting their policies at present (and assuming no shift towards quantitative easing) this pattern should continue. It will be down to the fiscal easing that comes through to kick start the respective economies.

Today we have no data from the UK but the DMO will be releasing their debt issuance timetable for the 1st qtr 2009. This will be very interesting given the already announced massive increase in Government spending for next year plus the overnight announcement from the FSA that new regulations will require UK Banks to hold an increased amount of highly liquid, AAA debt such as gilts perhaps??? Now call me a cynic but the timing is just uncanny. The Times points out that this dictate will necessitate the Banks tying up even more cash and in fact make them even less inclined to expand their commercial and personal loan books.

Today ought to be less volatile up to the release of the US non-farm payrolls which could be an accident waiting to happen for the good old Dollar. estimates for the headline number continue to edge higher with consensus around 340k but various calls for a drop in excess of 400k. The danger for the Greenback is all downside.

We also see some interesting numbers from the Eurozone but given their proximity to yesterday’s rate cut, are likely to have little lasting effect.

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The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.