Baydonhill Weekly FX Report 31st October 2008
Baydonhill Weekly FX Report 31st October 2008
Posted by progressivefx
at 10:22 AM on November 01, 2008
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Sterling is significantly lower against the dollar and over 1% higher against the euro. This reflects movements in the dollar/euro rate following better than expected US growth data. Gross domestic product fell by an annualised 0.3% in the third quarter. The impact of the weak US domestic economy was partially balanced by a 6% increase in exports. There is a limited volume of key economic data today. The major releases from a UK perspective are the Chartered Institute of Purchasing and Supply Managers surveys which are good leading indicators of trends in the UK economy. The surveys are expected to provide evidence that the contraction in the UK economy will continue throughout the winter months. We expect clear evidence of economic recovery to be apparent in early spring as the full impact of monetary policy easing works through the economy.
Period rates up to 5 years are broadly unchanged. Longer term rates are marginally higher in response to the stronger tone in equity markets following US data. Our perception is that the ultra long rates, 30 years plus, may be nearing the end of their downward trend. This reflects both the increasing volumes of government debt and the long term inflation implications of the massive central bank liquidity injections. There is still downward potential on period rates up to 5 years given the prospect of further base rate cuts and the probability that UK economic data in the coming weeks will be distinctly negative. We expect the UK economy to contract by circa 0.5% this quarter, followed by a gradual recovery in output as 2009 progresses. There has been a further reduction in LIBOR rates. Yesterday, 3 month LIBOR fixed at 5.88250 (11am fixing). Next week, the MPC meeting, on Thursday 6th is expected to endorse a 0.50% base rate reduction to 4.0%. The European Central Bank also meet on November 6th and may well reduce the euro repo rate.
European and US equity markets recorded significant gains yesterday in response to the focus on interest rate reductions. Short term, the underlying trend in equity markets is somewhat more positive than in many other markets, with sharp falls in equity prices being quickly followed by strong recoveries. The key test of equity markets is the reaction to what is expected to be negative economic data in the coming weeks. There was little equity market reaction to yesterday?s fall in the Nationwide house price index to minus 14.6%, which was broadly in line with forecast.
Brent crude has fallen to $61/ barrel, in response to the downturn in the US and Japanese economies. The weakness of the Japanese economy was highlighted by the 0.2% reduction in the benchmark overnight rate to 0.3%.
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