Continued Weak Data from Euroland and UK

Continued Weak Data from Euroland and UK …….

…. but neither having a materially long-term effect on exchange rates. The market perception of lower interest rates to come remains unchanged in the market but differences of opinion as to magnitude of cut and timetable are starting to emerge. Comments from Trichet and Andrew Sentence yesterday added to the uncertainty with the former intimating a pause in ECB rate cutting whilst Sentence appeared to argue both camps for Sterling. The traditionally arch-hawk of the committee warned of a further weakening of the manufacturing sector in the UK (this followed the report that industrial output in October had fallen by 4.9% y-on-y – the biggest drop in over 6-years) with the recession lasting longer and going deeper than had been previously forecast. He warned however that policy makers needed to look at different methods for handling the problem implying that interest rates being continually being reduced has less and less impact going forward.

The Zew data from the Eurozone and Germany yesterday were terrible which immediately caused the Euro to tumble through 1.2800. Rumours of semi-official demand however, caused the market to pause which was enough to see it rise sharply back towards 1.3000 where it stopped and near to where we start today. Sterling fell on the weak UK data and then was hit with the double whammy when Euro rose against the Dollar. This left the cross hitting a new all-time low below 1.1400. This afternoon’s testimony in front of the Treasury Select Committee by the Chancellor, Alistair Darling looks like the next chasm for Sterling to negotiate. Although neither party will be out to put the skids under Sterling, the conversation and comment might be viewed very nervously from abroad.

Elsewhere the Canadians did indeed cut their rates as expected but by a larger amount, 0.75%, than had been anticipated. More rate cuts to come from them in the near future. The same conclusion can be reached for Sweden following the release of the sharpest fall in inflation (down from 4% to 2.5%) in their country in 15-years. The Riksbank are expected to progress with their rate cutting programme, with a target of 1% being achieved over the next 3 policy meetings.

In the US, the extreme short end of the Treasury market remains the focus. On Monday, the 3-month bill auction was completed at a yield of a mere 0.005%, but that was surpassed by the 4-week bill sale last night. The minimum bid rate was set at 0.00% with the ‘high’ bid being established at -0.06%. In addition, even with a zero yield, the issue was covered 4.20 times and amazingly ‘non-professionals’ took 47% of the total – the second largest participation on record. In other words, it wasn’t just dealers causing those incredible results – the non-financial market is also quite willing to accept a zero yield (or less) in return for through year-end safety.

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.

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.