Close Brothers - FX OUTLOOK - Written 11/10/2007

The dollar drifted off day highs following strong jobless and trade data in the world's largest economy and as players looked ahead to tomorrow's raft of US data. The producer price index is expected to rise 0.4 % in September, after falling 1.4 % in the prior month. Meanwhile, data for retail sales are expected to show a modest 0.1 % gain in September.

Earlier, the Labor Department reported a fall in first time claims for unemployment insurance in the US last week to its lowest point in the third quarter, to 308,000 new claims, down 12,000 from the prior week and better than expectations for 315,000 new claims. The US trade data showed the deficit narrowed more than expected in August to 57.6 bln usd, its lowest level in seven months as record exports offset record oil import prices, below forecasts for a 59.0 bln usd deficit.

The upcoming meeting of the world's richest nations in Washington at the end of the month is also casting a shadow on the currency market as currencies are predicted to top the agenda at the G7 meeting.

Meanwhile, the euro strengthened following a series of hawkish comments from European Central Bank officials. ECB president Jean-Claude Trichet reiterated that economic growth in the euro zone remains robust and that inflation is subject to upside risks. In addition, euro group president Jean-Claude Juncke commented in an interview with Le Monde that the strength of the euro "reflects that of our economy" and that the ECB could not make concessions to euro zone members that object to its monetary policy. Both these comments offset Trichet's reiteration that excessive volatility and disorderly movements in exchange rates are undesirable and warned investors against "one-way bets".

Elsewhere, the pound remained on the back foot after a weak housing market report overnight supported speculation that the property market is putting the brakes on sharply, suffering from flagging confidence and higher interest rates. The Royal Institution of Chartered Surveyors said 14.6 % more of its members reported a fall than a rise in house prices in September.  This reading marks the first decline in two years and is far worse than expected. The weak findings offset the British Chambers of Commerce's survey of the manufacturing sector, which revealed that activity remains fairly healthy.

Elsewhere, the yen also remained on the back foot after the Bank of Japan kept interest rates unchanged at 0.5 %, the lowest among developed nations. This low rate, combined with a broad pickup in risk appetite as the US economic picture has brightened up, is once again encouraging investors to borrow yen and invest the funds in other high-yielding currencies elsewhere.

And finally, the South African rand firmed against the dollar and Sterling following an unexpected decision by the country's central bank to lift borrowing costs. The South African Reserve Bank raised interest rates by half a point to 10.5 % in an attempt to bring the country's high level of inflation under control, to the surprise of most analysts who had been expecting the bank to hold fire.

Prices at 17:20 GMT

GBPUSD – 2.0349

GBPEUR – 1.4310

EURUSD – 1.4222

GBPJPY – 239.45

GBPCHF – 2.4018

GBPAUD – 2.2479

GBPCAD – 1.9818

GBPZAR – 13.6456

Have a great day!

Christopher Huddleston
Sales Trader - FX & MM

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