Market Highlights
- USD seen as the safe haven again
- Is there still hope for Sterling?
- German sentiment figures support the euro
USD seen as the safe haven again
Last week saw several good pieces of data for the US with Housing, Consumer Confidence and Unemployment all coming in better than expected. This added risk appetite back into the market and saw sterling rise to the dizzy heights of over $1.67. However, world markets were suddenly rocked on Friday morning from the news that Dubai has announced it has major debt problems to the value of upto $80bln. The debt was brought about by the huge construction spree aimed at transforming its economy into a regional tourism and financial hub. The global recession brought about a fall in house prices of around 50% and left the country asking creditors for a six-month standstill on debt repayments. The dollar therefore strengthened off the back of this, as it has recently been seen as a safe haven currency by investors. This morning however, the Central Bank of the UAE announced it would “stand by” its countries lenders and offered support for its banks, which has eased concerns that the losses from Dubai will spread globally. This week sees the usual steady flow of data with the highlights being the ADP Employment figures on wednesday and the Non-Farm Payrolls on Friday afternoon which, as always, is a market mover.
Is there still hope for sterling?
The Bank Of England’s Governor, Mervyn King, has kept an open mind about any further Quantitative Easing last week. The surprise contraction in the recent 3rd quarter GDP figures hit the Pound badly and forced the Monetary Policy Committee to think hard about their short and medium term strategy. The UK is well and truly behind the U.S., Japan and Germany in the exit from the global recession with recovery proving to be slow and difficult. While there doesn’t appear to be an immediate risk to the UK’s credit rating, the BoE have indicated that policy tightening would have to take place over the next 2 to 3 years, which highlights the slowness of the central banks journey to get to the benchmark inflation rate of 2%. On the brighter side, the CBI announced retail sales grew at their fastest pace is 2 years, so hopefully this will be accompanied by strong Services and Manufacturing PMI data this coming Tuesday and Thursday.
German sentiment figures support the Euro
The German Business Climate Index rose to 93.9 from an upwardly revised figure from the previous month of 92. This was the highest level seen since August last year which shows how Germany has well and truly led the Eurozone out of recession. This figure gave encouraging news on exports and supported the current business situation. The euro has also been seen as one of the safe haven currencies, particularly in the light of events such as the Dubai debt crisis. One major concern for the European Central Bank though is the fact that lending in the Eurozone is contracting at an accelerated pace. Lending was down 0.8% from 0.3% in October, which will give the ECB plenty to discuss when they meet this week to discuss monetary policy. Watch out for Jean-Claude Trichets comments on Thursday afternoon.
By Nick Harrison, FX Dealer
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