Raphaels Bank Morning Commentary 9th September

publication date: Sep 9, 2008

Australian Dollar 2.1764         Norwegian Krone 9.9726        South African Rand 13.9260
     
Canadian Dollar 1.8690          New Zealand Dollar  2.6274   Arab Emirates Dirham  6.4548
  
Euro 1.2450                            Swedish Krona  11.789           United States Dollar 1.7589
  
Japanese Yen  189.64            Swiss Franc 1.9899                  Hong Kong Dollar 13.7065
  
                  
UK Inflation expectations uncertain even as PPI plummets.
As expected, yesterday saw colossal rallies on global equity markets prompted by news on Sunday that the US Government was preparing itself to take the ailing Fannie Mae and Freddie Mac mortgage giants into conservatorship.  Despite the fact that this move may prove to be disastrous on the long-term, investors breathed a collective sigh of relief, rocketing most indices up by up to 4 percent by the day’s close.  Corresponding to this, there was some limited degree of movement of funds back into some higher yielding currencies with a brief slackening of risk aversion as the Pound made some small gains, particularly versus the Dollar.  However, despite some limited volatility, prices of major pairs stayed pretty much on course as the Dollar finished the day continuing to plough new highs versus the Euro in the 1.41 region.  This is firmly keeping plenty of downside pressure on GBP/USD which continues to move around 1.76 whilst buoying GBP/EUR which today is moving around the 1.24 region.

Yesterday also saw the UK Producer Price Index which proved to be quite a shock to the markets, indicating to many a rapidly cooling inflation as the figure emerged at -2.0% month on month.  This figure, whilst it could be taken as a definite sign that the Bank of England will now be more disposed to cut interest rates rapidly in coming sessions, does however represent somewhat of an anomaly.  Many cite the recent reduction in oil prices as a major boost for Europe and the UK in fighting inflation which is not actually the case at all.  The price of oil is denominated on Dollars which means that, in the current scenario, this price reduction has been almost entirely nullified by the strengthening of the Dollar.  With this in mind the Bank faces a continued inflation threat from consistently high oil prices whilst price pressures from other materials seem to be abating.  It is certainly possible that in coming months, traders and investors may realise that they have priced in to many interest rate cuts to a UK economy that may recover sooner than is expected from a potential slowdown.  If this occurs then we could certainly expect Sterling to move back against some of its major pairs.

Today has thus far seen the RICS House Price Balance which firmly continues to cast gloom on housing markets, confirming that prices in August dropped at the fastest rate since 1978, at -12.7% year on year.  UK Manufacturing Production later this morning will also have some potential market influence in indicating any potential resilience on the core of the economy.  We also see Pending Home Sales from the US this afternoon which could have some potential market effects.