Raphaels Bank Morning Commentary 5th September

publication date: Sep 5, 2008

Australian Dollar 2.1631         Norwegian Krone 9.8548        South African Rand 14.1793
     
Canadian Dollar 1.8835         New Zealand Dollar  2.6373    Arab Emirates Dirham  6.4713
  
Euro 1.2366                            Swedish Krona  11.7140         United States Dollar 1.7616
  
Japanese Yen  187.32            Swiss Franc 1.9651                  Hong Kong Dollar 13.7534

BOE & ECB keep rates on hold as Sterling continues to weaken.
Sterling rose 0.5% at midday yesterday to $1.7824, benefiting from a 'relief rally' after the BoE decision to leave interest rates unchanged at 5.0 percent. Some investors had positioned for a BoE cut. The looming threat of recession has left the Bank of England under intense scrutiny as it has announced it has kept interest rates on hold for a 5th month, leaving them at 5%.  The Bank's Monetary Policy Committee were expected to keep rates on hold at 5% despite evidence the economic outlook is fast deteriorating, but expectations are rising that a darkening economic outlook will force it to cut rates later this year. The recent PMI data suggested any policy easing wouldn’t be forthcoming for at least another month. Any doubts about the Bank of England's intentions at the policy meeting should have been removed by the latest service sector PMI. Financial markets now clearly expect the BoE to cut rates a quarter percentage point by November and again to 4.5% percent by February.

Rates have been kept on hold by the BoE since April, showing that its main focus has been on fighting inflation. However, last week’s Q2 GDP figures showed that the UK economy stalled, with a flat second quarter performance. While oil prices are falling, the sharp decline in the value of the pound is adding to upside inflation risks.


The outlook for the ECB is not bright either after the European Central Bank cut its growth outlook for the 15-nation region, boosting the likelihood of interest rate cuts. The euro deepened losses after the chairman of euro zone finance ministers, Jean-Claude Juncker, said the zone's single currency was still effectively overvalued despite its recent fall. Jean-Claude Trichet, ECB President, said that Euro zone economic uncertainty was "particularly high. Trichet made these comments after the ECB left its benchmark lending rate at 4.25 percent yesterday. Trichet also added caution with his comment that inflation remains high and the risks to the upside. These comments suggest ECB policy makers aren’t in any rush to lower rates.

The ECB also slashed its growth forecast for the euro zone. Growth in the euro zone was seen at 1.1-1.7%, for a midpoint of 1.4%, in 2008 and 0.6-1.8%in 2009, for a 1.2% midpoint. Three months ago, the ECB had predicted economic growth of about 1.8 percent this year and 1.5% in 2009.

On the U.S. economic front, the dollar showed little reaction after a report showed private-sector job contraction of 33,000 last month, roughly in line with forecasts for job losses of 30,000. The ADP also revised July's gain to 1,000 from the 9,000 previously reported. One possible piece of market moving data out today is the August US non-farm payrolls at 1:30 this afternoon