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No change in US interest rates |
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Wednesday, 31 January 2007 |
- No change in US interest rates
- Inflation still worries the Fed
- US data dominates the diary
Welcome to February. Green is an interesting word isn’t it. It appears
to have changed its meaning a couple of times; initially it just
referred to a colour, then it became a euphemism for environmental
issues and its current misuse is as an excuse to overcharge the
public. Let’s be honest, a few quid per flight in ‘Green’ taxes won’t
stop Mr Blair from jetting around the globe in search of a purpose and
neither will it stop travellers from making holiday plans; so this is
just the latest revenue raiser for Gordon to fill some of his
horrendous borrowing shortfall. What we wouldn’t give for an honest
politician. And we would probably give more for a hint on the thoughts
of central bankers; at least the Fed was pretty up front about its
views last night when they left interest rates on hold but - but more
of that below. Bank of England member Timothy Besley told the Financial
Times this morning of his fears that inflation would not level and
decline as fast as the BOE would like nor as fast as they have
forecast. That is helping the Pound to stay in stasis and the decline
in Sterling that we have been waiting for and which is well overdue, is
still just a myth as I write. Other than the manufacturing Purchasing
Managers Index, there is nothing for Mr Besley to look at today but
there are heaps of US data releases and these are also covered below.
Clearly traders are awaiting the US data before breaking exchange rates
out of the current levels and we may have to wait for the rest of this
weeks US data due out on Friday before any major changes take place but
we are primed for some significant volatility. Have a great day and
‘White Rabbits’ by the way before you try anything.
The US Dollar is still taking incoming hits from all sides. The Chinese
authorities allowing the Yuan to gather strength seemingly in response
to US Treasury Secretary Paulson voicing his support for the Chinese
plan to allow gradual appreciation of their currency.
The US Federal Reserve left their base interest rate (the Fed funds
rate) on hold at 5.25 percent last night and offered little insight
in their statement other than to make it clear that they don’t think
inflation is beaten yet. If I may interpret, this is Fed-speak for
‘interest rates may yet have to rise and they aren’t likely to fall for
a while’. This will keep some strength in the USD and it will take a
wave of very negative data on the housing and/or personal consumption
level before the USD is likely to decline significantly. The Fed’s
favourite measure of inflationary pressures; personal consumption and
expenditure; is published at 13.30 GMT today. This will be very closely
watched as you might expect. Cutting to the chase; GBPUSD dipped
yesterday but failed to break below the significant levels in the $1.94
range. Another spike in this pair is likely but again the 14 year
channel top is still well below the mythical $2 to the Pound and that
should contain any upward move. USD buyers should be grabbing their currency on spikes and Sterling buyers would do well to sell some here before any rise.
New Zealand’s trade deficit was wider than expected in December at NZ$
6.16 billion. An annualised rise of 12 percent in imports made the
trade gap look awful on first reading but this rise in purchases from
overseas does demonstrate a level of consumer and business optimism and
that is a worrying sign for the Reserve Bank of New Zealand which
really needs to start to see signs of a cooling off in the NZ economy.
It does raise the spectre of higher interest rates in New Zealand and
the bond markets are starting to price in a 70 percent chance of a 25
basis point interest rate hike at the RBNZ’s March 8th meeting.
The
exchange rate affect is that the Kiwi Dollar will strengthen as it
attracts interest rate seeking international investors although a lot
of those funds are flowing from Japan and we are fast approaching the
end of the Japanese financial year. By April, many Japanese individuals
and companies which have invested funds overseas will draw them back to
Japan and return them to Japanese Yen to satisfy local taxation
requirements. This has the effect of strengthening the Yen and
weakening the other currencies so there will be volatility in the NZD
over the coming couple of months as the strengthening NZD is buffeted
by Yen buyers who will take advantage of any Kiwi Dollar strength and
create enough troughs and spikes to satisfy any ploughman.
The best measure of a man's honesty isn't his income tax return. It's the zero adjust on his bathroom scale.
Arthur C. Clarke
FX Research and Analysis undertaken by:
David Johnson - Halo Financial
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