• Sterling still holding up after upturn in retail sales
• US data dominates today’s economic diary

Market overview

The politics story is that T Blair has become the first PM to be interviewed by police in connection with criminal activity – what an addendum to his legacy. And we have cancelled an investigation into another criminal activity because it would upset the Saudi Royals who were also implicated. It seems that life at the top means never having to explain or say you’re sorry. The market news is that the US Dollar remains nervous ahead of today’s data and that the Pound is still retaining most of the strength it gathered in recent days. In fact GBPEUR is testing the highest levels in 5 months as traders speculate on whether UK interest rates will need to rise again after 2.7 percent inflation and an upturn in retail sales. Today is devoid of UK data but we do get EU inflation and a raft of numbers from the US. And of course, this is one of the last days before Christmas when trading rooms will be full of traders. The next two weeks will be lighter on volume and liquidity and therefore far more susceptible to wild and unexplained volatility. This, believe me, is a good thing for all concerned because it means that if you put your tongue firmly in your cheek and pluck a dream exchange rate out of thin air, by placing a firm automated currency market order over the Christmas period, you might just get a very welcome Christmas gift. The ‘Doh’ story is that England’s cricketers twitched again and let the Aussies recover in the third and possibly decisive test and the ‘Ahhhh’ story is that the world’s tallest man used his ‘world’s longest’ arms to retrieve swallowed plastic from the gullets of two dolphins and saved their lives. His phone hasn’t stopped ringing since, as vets request his help whilst pregnant cows and horses everywhere have been seen running for cover.

If you're migrating - A little more detail

The New Zealand Dollar is poised to make more substantial gains after manufacturing sales figures rose 2.7 percent in the third quarter of 2006 and that came on the back of a quarter two growth figure of 4.9 percent. These growth numbers come ahead of next weeks economic growth assessment and traders are girding their loins against another big growth number. The Governor of the Reserve Bank of New Zealand is already hinting heavily that interest rates in NZ will have to rise from the already high current level of 7.25 percent and the current interest rate is proving very attractive to international investors. Higher interest rates would therefore be more attractive, so the rising expectation of rising interest rates is likely to add to the strength of the NZ Dollar and that doesn’t bode well for those who need to buy Kiwi Dollars. Early action is probably the key to avoiding later tears and I would urge everyone who has Kiwi Dollars to buy to look closely at whether they are in a position to book at least some of their requirements now on Forward Contracts. If you’re not familiar with Forward Contracts, please contact your FX Consultant who will be happy to explain.

If you're buying property overseas - A little more detail

Today is all about the US Dollar and with some of the most important data releases of the month being thrown at us from 13.30 GMT onwards. Yesterday’s improved initial jobless claims set the tone and the consensus amongst analysts and economists is that we should see further good news for the US Dollar today and that we should see an element of USD strength as a result. In fact recent data from the US has been rather encouraging and has certainly been enough to make those with ‘it’s going to $2’ banners question their absolute conviction that the GBPUSD exchange rate is on a one way path to the sky. We are probably in the throes of a correction from the highs seen a matter of weeks ago and that should bring us back to the very low $1.90s and even into the high $1.80s before it is over. The tests are at $1.94 and $1.90 and then the major test will come at $1.87. If you think this is a long way away, remember that as recently as April 2006 we were at $1.70. Food for thought?

Thought for the day

Absolute abuse of power and an act of arrogance.
Charles Wells

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FX Research and Analysis undertaken by:
David Johnson - Halo Financial