Close Brothers - FX OUTLOOK 11/10/2007

The yen struck multi-week lows against both the dollar and the euro as the carry trade has come back into fashion on renewed appetite for risk. The liquidity crisis and subsequent credit crunch in international financial markets brought an end to riskier ventures such as the carry trade, where investors borrow at the super-low rates available in Japan in the pursuit of higher-yielding rewards elsewhere, such as in European assets. However, there are signs that the recent turmoil in international markets is abating, and that the US economy may escape recession, and that has helped fuel the market's risk appetite.

The Bank of Japan's latest policy meeting got underway yesterday,the yen was weaker against major currencies this morning shortly after the Bank of Japan announced it is keeping its overnight call rate target unchanged at 0.5 % for the ninth straight meeting. The move was widely expected as it gives the central bank more time to assess the impact of the summer credit turmoil on financial markets and, in particular, the US economy. There was no real expectation that we'll see another rate hike here just yet. Again it is still a case of 'when' not 'if' rates will rise, but so long as the yen continues to yield so poorly then there's little to dissuade carry-trades at least in the short term.

The dollar has also prospered, climbing up to a high today of 117.53 yen, which is, bar Monday, its highest level since mid-August. Tuesday night's minutes to the last rate-setting meeting of the US Federal Reserve, when the benchmark funds rate was reduced by half a percentage point to 4.75 % amid concerns over the credit crunch, may have helped stoke the carry traders as they put a question mark on the likelihood of another interest rate reduction.

Though the FOMC said the easing of policy is unlikely to adversely affect the outlook for inflation, they did note hat inflation risks could be heightened if the dollar were to continue to depreciate significantly. Further, Fed officials William Poole and Janet Yellen noted the potential inflationary impact of a falling dollar. Though responsibility for the currency falls with the US Treasury, the concerns noted by Poole and Yellen were picked up by the market, helping the dollar to recover some ground.

Elsewhere, the pound remained buoyed by relatively hawkish comments on Tuesday night from Bank of England governor Mervyn King. King told business professionals that the central bank would not lower interest rates simply to make it easier for the financial sector, despite the ongoing liquidity problems, and emphasised that it would continue to monitor inflationary risks.

Looking ahead, market participants will focus on the latest house price survey today from the Royal Institution for Chartered Surveyors for any signs that housing activity in the UK has been affected by either the BoE's higher borrowing rates or the recent credit crunch turmoil.

Prices at the London open

GBPUSD – 2.0386

GBPEUR – 1.4371

EURUSD – 1.4186

GBPJPY – 239.03

GBPCHF – 2.4047

GBPAUD – 2.2617

GBPCAD – 1.9986

GBPZAR – 13.9809

Have a great day!

ENDS

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