NEWS / Foreign Exchange

Front page news as the pound trades above $2

Overview

To much media fanfare the Dow Jones Industrial Average set a new record high at 13,132, as did the Wilshire, while Nasdaq and S&P 500 are at their best levels in years. European markets were mixed, trying to rally early on but then retreating; likewise Asian ones except Jakarta which posted a new record high. Persistent US dollar weakness this month obviously has played a part, not just against major currencies but now also against others: the Indian rupee at 40.55 is at its strongest since 1998 and the Israeli shekel at 3.9925 strongest since 2000. The Yen continues to slug it out with the dollar to see which is bottom of the pile, pushing EUR/JPY to a new record high at 162.88. On the Fed??™s Effective Exchange rate the greenback hit 78.99 Wednesday, its weakest ever (records go back to 1973). Interest rates hovered inconclusively around last week??™s levels except the Schatz which touched 4.178%, its highest since June 2002. The Reserve Bank of New Zealand raised rates 25 basis points to 7.75% pushing Kiwi bond yields to their highest in two years. Commodities were sidelined, some up a fraction others down a bit, although precious metals suffered a fairly sharp sell-off on Thursday (cause unclear). NYMEX Gasoline briefly touched $2.24 per gallon. The Baltic Dry Freight Rate index matched the record high set in December 2004.

Political and Economic Developments

US Housing market statistics were weaker than expected: Existing Home Sales dipped to an annualised rate of 6.12M in March (lowest since July 2003 and well below the 2005 peak at 7.21M), while New Home Sales were running at 847K in February and March (lowest since 2000 and way below the July 2005 peak at 1367K). NAHB Chief Economist David Seiders reduced his forecast for New Home Starts to 1.44M in 2007 because of tighter lending criteria and the massive overhang of 7.8 months??™ worth of supply. US Q1 GDP +1.3%, lowest since December 2002 and well below potential of 3.0%. Interesting to note that in Spain New Homes were going up at a rate of 800K last year. The sector has been the backbone of the economy for the last decade, and the Central Bank estimates that after double digit price increases over the last five years housing is overvalued by 30%. With five of the top ten real-estate companies dropping by over 10% this week and the resignation of the market regulator, Economy Minister Solbes told us not to panic. Another government source said the property bubble had not burst, and Bank of Spain Governor Angel said the sector would have a soft landing. I??™m sure that makes Spanish householders and shareholders feel a lot better! The Ibex index is down 5.25% from last Friday??™s record. Rather worryingly it also forms a massive ???shooting star??™ candle on the monthly chart and ???bearish engulfing??™ one on the weekly. A similar pattern is in Mumbai??™s main index.

Underlying Themes

Twenty-two year old Price Harry??™s deployment in Iraq is under review and his friends say he will be very disappointed if he can??™t go but won??™t quit his ???A??™ Squadron of the Blues and Royals. The military fear he will put other British soldiers at risk because he will be a target for insurgents. Republicans in Britain might consider this an excellent idea, sending his brother, father, uncles and grandfather along for the ride too.

What to watch for next week

Monday the 30th is Green Day holiday in Japan while Tuesday the 1st May is a Labour Day holiday in a great many countries. Numbers-wise the week kicks off with German March Retail Sales, Eurozone M3 and April Sentiment, UK March BBA Lending figures and April GfK Confidence. Then US March Personal Income, PCE Deflator, Construction Spending and April Chicago Purchasing Managers. Tuesday UK April HBOS House Prices, Manufacturing PMI, CBI Distributive Trades, US March Pending Home Sales, April Manufacturing ISM and vehicle sales late in the day. Wednesday German April Unemployment and Manufacturing PMI, UK March Bank Lending, EZ13 Unemployment, US Factory Orders, April Challenger Job Cuts and ADP Employment Change. Thursday elections for the Scottish Parliament, the Welsh Assembly and English local councils. UK April Official Reserves and Services PMI, EZ13 March PPI, US Q1 Unit Labour Costs and Non-Farm Productivity, plus April Non-Manufacturing ISM. Friday April Services PMI??™s for the different European countries, EZ13 March Retail Sales, US April Non-Farm Payrolls and Unemployment. Sunday 6th the second round of French Presidential elections.

Positioning and Technical Analysis

Take a close look at weekly charts on Monday and monthly ones on Tuesday, looking for significant breaks. Many instruments are at key levels and holiday-thin conditions could lead to some very large and scary moves. We still feel that Yen crosses might suffer a sudden big drop, as they did in February/March (having not gone to plan for the last three weeks), and that stock indices might also suffer from something similar. The US dollar will probably be under persistent pressure, and as one currency breaks to new high it will drag up the next and so on in a domino effect. The risk is that this will spiral out of control sooner rather than later, especially as central bankers have taken their eyes off this particular ball and Joe Average is only just waking up to it. The repercussions for trade, pricing, inflation, wages, everything in fact are huge. Interest rates are likely to be sidelined and commodity markets twitchy.

Have a nice weekend!