Forwards Gain Retail Appeal

The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the difference between owning a property and no longer being able to afford it.

Read More: Brits Gambling On Volatile Currency Markets

Central Banks in the News

As we wrote last week, the direction of the Dollar may be influenced more by external economic events rather than by internal activity.  Accordingly, it would behoove forex traders to direct their attention away from the Fed and towards the Bank of England and the European Central Bank, both of which face important monetary policy decisions later in the month. With regard to the Bank of England, futures markets have priced in a 2/3 chance that rates will be cut by 25 basis points. In the case of the ECB, the markets are expecting rates to be maintained at current levels. However, analysts will be scrutinizing the Banks' respective press releases and monitoring other developments in this area due to the implications for the US-EU-Britain interest rate differential.  Reuters reports:

Some analysts think that hawkish comments from Trichet will be brushed aside with weaker economic data leading to the prospect of falling euro zone rates later in the year.

Read More: Pound down, others flat before ECB, BoE decisions

Interest Rate Story Hurts Pound

The British Pound has been reeling since the Bank of England cut rates at the beginning of this month, from 5.75% to 5.50%.  Last week, the minutes for the meeting were released.  They revealed that that members of the Bank were growing increasingly nervous about the state of the British economy and are worrying particularly about how fallout from the credit crunch will impact growth.  British interest rates are still among the highest in the industrialized world, behind only Australia and New Zealand.  Thus, it seems investors are punishing the Pound indirectly for the rate cuts, because of fears concerning the near-term prognosis for the British economy.  At the same time, the minutes indicated that members of the Bank were adamant about not lowering rates further, so some of the concerns may be overblown.

Read More:  Pound weakens after BoE minutes show concerns for growth

ECB to Hold Rates

The European Central Bank (ECB) will likely maintain its benchmark interest rate at 4.00% at its meeting his week.  The Bank of England is also expected to hold its lending rate in place, at 5.75%.  While these two moves should be seen by Dollar bulls as acts of clemency, they are more akin to a stay of execution than to a commutation of its death sentence.  The reasoning is that it is inevitable that the US-EU interest rate difference will be bridged over the next few months, as the Fed continues to lower rates while the ECB is in the process of hiking them.  The only question is when.  Accordingly, analysts will be paying close attention to the language employed by the heads of the various Central Banks at their next meetings to get a sense of timing.

Read More: Dollar hovers above lows

UK Pound Nears Plateau

The UK Pound has been on a tear recently, both against the USD and more surprisingly, against the Euro.  The currency has been given a boost by the Bank of England’s reluctance to cut its benchmark interest rate, which at 5.75%, remains the highest among the world’s major currencies.  However, many economists feel the case for a rate cut is growing stronger every month, whether or not the Bank of England is willing to acknowledge it.  Inflation is only moderately high, while the fall in housing prices-exacerbated by a prolonged period of tight money-threatens to drag down the entire economy.  The markets are still pricing in a rate cut by year-end, which would surely drag down the Pound should it obtain.  Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect will continue to grow, in reverse proportions to its expectations of a further hike in U.K. interest rates,” said…a senior currency strategist.

Read More: Sterling's Strength Can't Last Much Longer

Bank of UK to lower rates

The Central Bank of the UK will likely lower interest rates at its next meeting, following the lead of the Fed. The most recent British economic data indicated that inflation has fallen to its lowest level in over a year.  Moreover, UK (and European for that matter) monetary policy prioritizes price stability over employment, by unofficially targeting an inflation benchmark.  Thus, without regard to economic growth, the Bank of UK will adjust interest rates accordingly.  While the Pound-Dollar exchange rate is less sensitive to relative interest rates, the Pound has already fallen against the Euro, since the two countries compete over foreign capital.  Bloomberg News reports:

"The move down is probably going to continue. Sterling will remain under pressure. If any major central bank is going to emulate the Fed and cut rates, it's going to be the BOE.'' 

Read More: U.K. Pound Falls for Third Week Against Euro on Rate Cut Views

Promising Survey Strengthens Pound

Although the British pound suffered earlier in the week from a large Bank of England loan, the currency has been lifted due to a survey taken by UK manufacturers. The results of the survey, which inquired about their order books, showed that manufacturers were more successful this month than they've been in over a decade. Analysts did not expect such a promising report, as it proved that the UK is handling global credit problems better than most countries. According to Forbes:

The Confederation of British Industry revealed that a balance of +9 pct of firms polled reported that their order books were above normal in August - the highest level for more than 12 years.

Read more: Pound boosted by buoyant UK manufacturing survey

Pound Weakened After Large BoE Loan

Although it is not known whether the Bank of England loaned £314 million to one borrower or many yesterday, the effects were still the same. A one-day loan of such magnitude weakened the domestic currency, if only temporarily. As experts point out, this isn't entirely unusual and the economy has survived much larger Bank of England loans. Reports Forbes:

Significantly more than 314 mln stg this [sic] has been borrowed in one day in the recent past -- for example nearly 4 bln stg on June 29 and 2 bln on July 2, he [George Buckley] added.

Read more: Pounds weakens as BoE confirms 314 mln stg use of its credit facility

Bank of England Raises Rates

The Bank of England raised interest rates for the second time in as many months yesterday, to 5.75%. As a result, the UK has widened its lead over the US as the country with the highest interest rates in the industrialized world, after New Zealand. Moreover,  the UK is becoming an increasingly viable alternative to the US as a target for risk-averse investors. The British Pound is hovering around a record high against the USD, which can probably expect to suffer prolonged decline against the world’s majors if it falls behind in attracting risk-free foreign capital. The Financial Times reports:

“The statement accompanying the rate hike gives few firm clues as to future interest rate movements, with the Bank of England…concluding that the risks to the inflation outlook are still tilted to the upside.”

Read More: BoE rate decision boosts pound

Bank of England Mulls Rate Hike

Since the beginning of 2007, the Bank of England has raised Britain’s benchmark interest rate by 50 basis points, to 5.50%.  While the Bank voted earlier this month to maintain rates at current levels, many analysts are speculating that it will resume hiking rates again in July.  A recent spate of economic data has supported the notion that Britain’s economy is on stable ground.  As a result, the specter of inflation is once again looming, and the Bank, which has a reputation for monetary hawkishness, will be quick to act if inflation stays above the Bank’s comfort level.  While the rate hike could certainly put a damper on Britain's economy, it is likely to feed continued short-term interest in the Pound, is a viable risk-free alternative to the USD.

Read More: King comments send sterling climbing

Pound Surges to 15-Year High

Since 1992, two macroeconomic events had not occurred in Britain: price inflation has no exceeded 3% annually and the British Pound has not surpassed the $2 barrier.  Both events were realized today, however, as an early-morning release of economic data indicated inflation in Britain was hovering around 3.1% and the British Pound quickly rose above 2 USD/Pound.  Interest rate futures also witnessed an immediate correction, to the extent that the markets are now pricing in a British benchmark interest rate of 5.75% 6 months from now, .5% above the current rate.  Meanwhile, US inflation statistics were dovish, suggesting the gap between British and US interest rates is set to widen, which should propel the Pound further upwards.  The Financial Times reports:

There is little that is inevitable about currencies moving in line with expected interest rates and nothing in long-term trends that allows people to predict currency movements in connection with inflation and other variables. But on Tuesday, the currencies moved exactly as if they were linked to the inflation figures by an umbilical cord.

Read More: Pound rises on prices and rates fears

UK may raise rates in March

Today saw the release of the 'minutes' from last month's meeting of the UK Central Reserve Bank, revealing that members of the Bank's monetary policy committee voted 7-2 to hold rates at their current levels. That there were two dissenting votes is confirmation to some economists that the Bank is planning to hike rates again in the near-term, perhaps as soon as March. British short-term interest rates, at 5.25% are already on par with American rates, and another rate hike would further lessen the appeal of risk-averse investment in America. Investors will be eying inflation data closely over the coming weeks, which could provide the impetus for a rate hike at the next meeting.

Read More: MPC voted 7-2 to hold rates

Rate hike buoys British Pound

The British Pound received a boost today when the Central Bank of England raised interest rates to 5.25%, which represents parity with American interest rates. The move shocked investors and traders who expected the Bank to leave rates unchanged. Risk-averse investors are now fully incentivized to move funds to Britain since interest rate levels there are now among the most competitive in the industrialized world. Further, as the British economy still hasn’t peaked, it is possible that the Bank of England will raise rates further. Meanwhile, investors are already speculating as to when the Federal Reserve Bank will begin loosening its monetary policy, at which point it will officially be more attractive to invest in Britain. Either way, it seems the USD is in for a long and bumpy ride. The Financial Times reports:

The move sparked speculation that data next Tuesday could show December UK consumer price index inflation rising above November’s 2.7 per cent reading, since the committee would have had those figures in their possession.

Read More: Surprise rate rise boosts sterling

British Pound may harm economy

As the British Pound hovers around a 14-year high against the USD, economists have begun to assess the implications. The most obvious consequence is that UK exports will become less attractive to buyers in the US, which is one of Britain’s primary export markets. Along the same lines, British people may begin funneling some of their consumption and investment dollars into the US to take advantage of comparatively lower prices in the US. Many analysts are predicting that this sudden inflow of British capital into the US will halt the decline of the USD against the Pound. The savviest investors have already begun to lock in the current exchange rate to hedge against a reversal. The Finance Daily reports:

“Forward contracts are a great way for people looking to move to the US to take advantage of the favourable exchange rate.” In essence, a 'forward contract' means that you can buy the currency now and pay for it later.

Read More: Mixed Benefits to Strong Pound Stateside

Pound continues to surge

The Pound is closing in on a two-year high against the USD en route to crossing the mythical barrier of 2 USD. Many traders and economists believe that it is only a matter of time before this threshold is breached- that it is a question of when and not if it will happen. This month, the Bank of England raised short-term interest rates to 5%, bridging the gap with US rates and eroding one of the last pillars that is propping up the USD. Once interest rates converge, many short term investors will likely shift funds out of US capital markets, and the USD will adjust to more closely reflect economic fundamentals.

Read More: Pound threatening $2 mark

UK Central Bank Raises Rates

The Pound has been idling near a multi-year high against the USD for several months now, but it can’t seem to break through the psychological resistance of $1.90. Against that backdrop, the Central Bank of the UK raised interest rates this week by 25 basis points, to 5%. This leaves UK rates potentially one rate hike away from parity with American rates, which seem more likely to be lowered than raised, given current circumstances. Narrowing interest rate differentials may remove the last barrier that has stood in the way of a broad-based USD decline. Perhaps, risk-averse investors will begin shifting some of their capital out of the US, and into UK and Europe, which is also in the midst of raising rates. The Financial Times reports:

The statement [of the UK Central Bank] did not give any clear signals as to the future path of UK interest rates and as such came as a disappointment to sterling bulls given the high probability that was attached to a follow-up rate rise in the first quarter of 2007.

Read More: BoE disappoints sterling bulls

Pound and Euro move in lockstep

In recent years, the British Pound and the Euro have begun to converge in value, so much so that both currencies have traded within 5% of each other for almost a year now. There are a couple of explanations for this trend. First, the relationship between the Pound and the Euro are largely symbolic. Perhaps, investors are grouping the two currencies together because of some perceived economic and/or political similarities. Second, it seems that all of the currencies that are supported by any semblance of sound economic fundamentals have risen against the USD, so it is possible that the Pound-Euro convergence is simply the result of both currencies simultaneously appreciating against the USD. Monetary policy and economic cycles are not aligned in Europe and Britain, so it doesn’t seem this link has any strong fundamental basis. Whatever the reason, in all aspects except for in name, the Pound has officially been absorbed into the Euro. The Financial Times reports:

From the euro’s launch in January 1999 until 2003, the pound initially traded in a wide 21.1 per cent range against the euro. Since then, volatility has been significantly reduced with the trading range falling to 8.6 per cent in 2004 and 7.1 in 2005.

Read More: Sterling in accord with the euro

UK inflation data buoys Pound

Traders bullish on the British Pound have been waiting anxiously for economic data to be released that would provide an impetus for the Central Bank of Britain to raise interest rates. On Tuesday, they got their wish, as a flurry of data revealed British price levels are slowly creeping up. Despite sagging energy prices, core inflation is running at an annualized rate of 2.4%, and retail sales are up nearly 4% in 2006. The new consensus is for the UK Bank to raise interest rates by 25 basis points at its next meeting, which is scheduled for November. The Financial Times reports:

By mid-afternoon in New York, the pound was 0.5 per cent higher at a one-week high of $1.8700 against the dollar and up 0.4 per cent to £0.6707 against the euro.

Read More: Inflation Figures Boost Sterling

Interest rates rise in Europe

The two most important Central Banks in Europe independently raised interest rates today. The European Central Bank (ECB) was first to announce a rate hike, in a move that was widely predicted by investors. The Central Bank of UK, however, caught most investors completely off guard when it announced a rate hike of its own. It appears to be a coincidence that both banks raised rates on the same day, as the economic policies of the UK and of Europe are not entirely related. The news made USD bulls nervous on two fronts: first, the narrowing of interest rate differentials means it is more attractive to move capital to Europe. Second, and less obvious, is the implication that growth is picking up in Europe, at the very moment it is slowing down in the US. The Financial Times reports:

Jean-Claude Trichet, ECB president… said that if the eurozone economy performed as the bank expected, “a progressive withdrawal of monetary accommodation will be warranted”.

Read More: ECB and UK join drive to raise rates

ECB signals further rate hikes

Yesterday, I reported that Central Banks are becoming more transparent in matters of monetary policy. As if on cue, today the European Central Bank and Bank of England offered separate insight into the directions of their respective interest rates. The ECB hinted that it would likely raise interest rates twice in the next year from the current level of 2.25%, while the Bank of England indicated that a cut in its interest rates would take place in March. The corresponding changes in interest rate differentials should benefit the Euro and hurt the British Pound. Reuters reports:

But some analysts see U.S. rate rises stopping there. The latest report about the ECB is seen as likely to boost the euro. “It’s a reminder that not only the Fed but also the ECB is raising interest rates,” said one currency strategist.

Read More: Euro jumps briefly on rate speculation, pound down

UK signals possibility of rate cut

The US Federal Reserve Bank is currently in the process of raising interest rates. Meanwhile, the European Central Bank and Bank of Japan are preparing to begin implementing tighter monetary policies at unknown dates in the short term. The Bank of England, however, is moving in the opposite direction, having recently announced that it may cut rates in the first half of 2006. The Bank of England is caught in the unenviable position of trying to simultaneously manage a housing bubble, rising inflation, and slowing growth. Previously, Britain’s Central Bank had prioritized housing and price stability. This latest announcement, however, represents a change in tack. As investors price in the possibility of multiple rate hikes, the UK Sterling should add to its 6% decline against the USD so far this year. Bloomberg News reports:

“The market was always complacent about the performance of the U.K. economy,” said a currency strategist at Royal Bank of Scotland. “Comments…play into the hands of a bad performance for sterling against the dollar next year.”

Read More: Pound Drops, U.K. Bonds Rise as Bean Hints First-Half Rate Cut

British economy is lackluster

In a recent report, Britain’s Central Bank warned that the nation’s economy would likely grow at a pace of 1.75% in 2005, which would represent the worst year of growth in over a decade. This latest forecast is significantly from earlier forecasts of 3-3.5%, that the Central Bank had released earlier this year. According to experts, rising energy prices are responsible. Others pin the blame squarely on the slowing real estate market, which has spurred a sharp decline in the consumption component of GDP. Ironically, other G7 countries, including Germany and Japan, are finally showing signs of growth. Britain’s economy, however, seems headed in the opposite direction. The Wall Street Journal reports:

Calling 2005 “the toughest and most challenging” of his eight years as treasury chief, Gordon Brown blamed “a virtual doubling of global oil and commodity prices.”

Read More: British Growth, at 1.75%, Is Slowest Since 1992

Will UK continue to lower rates?

Last week, the UK Central Bank voted to lower interest rates for the first time in two years, to 4.5%. Economists and analysts are already mooting the possibility of another decline before year-end, in anticipation of lower-than-expected UK economic growth. Several UK policy makers, however, are reluctant to lower rates any further, lest they incite another housing bubble. Rising home prices have already fuelled excessive borrowing and a proportionate rise in consumer spending. Officials, however, are worried that these spending levels have reached dangerous levels, rising twice as fast as wage growth statistics would seem to imply. The upshot is a very low likelihood of continued rate cuts. The Economist reports:

It is unlikely that Britons are in for a series of interest-rate cuts. The Bank of England knows that no good will come of re-inflating the housing bubble, which would only result in worse pain down the road, as more consumers fall into the trap of too much debt.

Read More: http://www.economist.com/agenda/displayStory.cfm?story_id=4246182

UK lowers interest rates

Britain recently became the first developed country in two years to lower interest rates, guiding its repo rate downward to 4.5%. However, representatives from the Central Bank effectively dismissed speculation that other rate cuts would follow, calling the move “economic fine-tuning.” They will continue to target inflation, which is likely to resurface once Britain’s economy resumes its expansion. Many analysts believe policy-makers in other developed regions will soon follow suit, ushering in a period of tight monetary policy. Those analysts may be forced to wait, however. The Financial Times reports:

The European Central Bank maintained its main interest rate at 2 per cent. Recently, evidence from business surveys appeared to back its view that conditions in the eurozone were improving.

Read More: Bank of England makes first rate cut in two years

British rate cuts appear ‘imminent’

The release of the minutes of last month’s meeting of Britain’s Central Bank revealed a growing minority of members in favor of lowering interest rates.  The official vote was 5-4 in favor of maintaining interest rates at current levels. However, few economists and pundits had reason to believe the vote would be so close. While many traders had already begun to price lower interest rates into bonds prior to last month’s meeting, it seems a rate cut at the next meeting is a near certainty. Recent economic data not only suggests the economy is slowing down, but also that inflation is likely to be lower than expected. As a result, both the members of the Central Bank targeting inflation indices as well as those targeting general economic performance, would seem to have a solid basis for lowering rates. The Financial Times reports:

Sterling had already been on the ropes prior to the MPC announcement…Against this backdrop sterling fell to a 19-month low in trade-weighted terms.

Read More: Sterling falls as BoE votes 5-4 against rate cut

British Central Bank mulls rate cuts

At its last meeting, Britain's Central Bank voted to leave the national interest rate unchanged at  4.75%. With new data pouring in every day suggesting Britain's economy is in trouble, the Bank's leaders may soon rethink their stance on interest rates. Consumer spending, considered by many British economists to be the most important growth driver, is declining. The drop in savings rates and stagnation of home prices indicates consumers have already spent all that can be expected. Moreover, last week's terrorist attacks will likely cause consumer confidence to fall further, mitigating the possibility of a fast recovery. Economic growth is now projected at 2.1% for 2005, down from 2.75% in 2004. When the Central Bank meets next month, the upshot will most certainly be lower interest rates. Traders and investors concur, and have priced two rate cuts into British debt futures, implying a rate of 4.25% at the year's end. Rate cuts or not, the British Pound will most likely continue to slide. The Economist reports:

The strong chance of feeble growth in the second quarter—the National Institute of Economic and Social Research is forecasting a rise in GDP of only 0.3%—means that a cut in August is on the cards. In a poll of economists on July 5th by Reuters, 26 out of 43 said that rates would fall next month.

Read More: They're coming down soon

British Pound falls after terrorist attacks

Forex traders and investors responded to the terrorist attacks which rocked London today by sending the British Pound to near 18-month lows against the USD.  As soon as the news reached the trading floors of forex dealers, panic set in, and the Pound quickly lost 1% of its value, relative to the USD. Experts agree both the attack-and the ensuing panic in the markets-could have been far worse.  One trader spoke of a “risk premium” which has been built into the currencies of nations that are potentially susceptible to terrorism, and probably prevented the Pound from depreciating further. Investors begin to understand the relatively minor implications of this latest attack, the Pound may well recover.  Forbes reports:

“The knee-jerk reaction was quite violent across all markets and the usual safe-haven trades were being put on,” said one currency strategist.  “The market is now backing off a little and questioning the magnitude of the implications.”

Read More: Sterling hits 18-month low against dollar

British Pound may decline as growth flattens

For the last few years, speculators in search of high interest rates have poured ‘hot money’ into Britain, causing the Pound to appreciate.  Now, it seems the Pound may be overvalued, rendering British exports uncompetitive.  A new spate of economic data indicates the British economy is slowing rapidly. In addition, a British housing bubble has begun to deflate, causing a subsequent decline in consumption. As Britain’s Central Bank prepares to lower interest rates, it seems investment will follow the same downward path as consumption. It may take a massive correction of Britain’s exchange rate to stem the decline of its economy. The Times Online reports:

With sterling’s valuation the focus of renewed attention, pressure on the pound will almost certainly intensify as currency markets home in on the increasingly apparent vulnerabilities of Britain’s economy.

Read More: Faltering growth knocks pound's potency

British GDP forecasts signal rate cuts

According to fresh economic data, growth is slowing in Britain. Real GDP growth of 2.1% is now projected, compared to earlier forecasts in the 2.7% range. Declining real GDP forecasts accompanied the release of trade data and housing statistics, which also seemed to signal economic slowdown. The situation is not as dire as the data would suggest, as much of the forecasted decline can be attributed to higher-than-expected inflation. Nonetheless, a rate cut at the next Central Bank meeting looks acutely possible. In recent meetings, a minority of central bank governors have proposed rate cuts, which were ultimately vetoed.  While the GDP data would seem to necessitate a cut at the next meeting, nothing can be assumed. For instance, traders have currently priced in a mere .03% cut (which is impossible) into the price of British interest rate futures. The Financial Times reports:

"The market can slam a currency quickly if it believes that a fundamental shift in interest rate psychology could be afoot," said  senior currency trader. Said another trader, "The sterling looked “overvalued” against the main European crosses." [He] advised his clients to build a long euro/sterling position.

Read More: Sterling hits new 8-month low in GDP downgrade

Britain's Labor party re-elected

Britain's Labor Party has been re-elected, albeit by a narrow margin. While still a healthy 66 seats, the party's majority in the House of Commons has been greatly diminished. This election has several important implications for Britain's economy. First, the defeat of the conservative party mitigates the likelihood that there will be tax cuts and/or decreases in government spending over the next few years. More importantly, Britain may now become more integrated in the European Union. Tony Blair is notorious for his support of the EU. Accordingly, he will likely campaign for Britain to ratify the EU Constitution if such a referendum is posed to its people. However, this is conditional on France and the Netherlands first approving the Constitution, which is by no means guaranteed. If Britain were to ratify the EU Constitution, it could conceivably abandon the pound in favor of the Euro. However, Labor's narrow majority over conservatives will likely preclude this from happening. Morgan Stanley reports:

All in all, the reduced Labour majority perhaps makes it more likely that continuity, rather than radical reform, will characterise economic policy over the next four years.

Read More: Closer than the last one

Britain calls for regulation of currency markets

A British regulatory agency recently announced its belief that global currency markets should be regulated. Equity and debt markets are already heavily regulated, so why not currency markets, in which $2 trillion+ worth of currencies are exchanged every day. The regulatory agency's main suggestion was to separate analysts and traders, similar to what has been done in banks' debt and equity departments. There is a clear conflict of interest, or ability to manipulate currency markets, when analysts and traders collude. If a bank's analysts advise the bank's clients on the direction it believes a particular currency to be headed, that bank's traders could profit from the information. The analogy to equity markets is self-evident. The problem is one of jurisdiction and boundaries. Capital markets are regulated by an agency within the nation that the capital is invested in. Currencies, on the other hand, are often traded by parties outside of the currency's home country. Scotsman.com reports:

THE Forex market’s argument is that practitioner regulation, or self-regulation, is a better tool in fighting tricks of the trade and loophole hunting, rather than forced compliance with a one-size-fits-all rule.

Read More: Banking on a regulated market for currencies