Close Brothers - FX OUTLOOK 16/10/2007

Close Brothers - FX OUTLOOK 16/10/2007

The dollar is off earlier session lows against the euro after some further US data reinforced expectations that the US Federal Reserve will not be cutting borrowing costs again this month. The Empire State manufacturing index nearly doubled to 28.75 in October as both new orders and shipments rebounded from September declines. We had expected a small drop to 14.40 after the index's 10-point plunge to 14.70 in September.

Nevertheless, since the Fed won't have the more comprehensive ISM manufacturing survey for October available when it meets at the end of this month, this survey and the Philly Fed will be all it has to go on, and on that basis, this is another reason to adopt a wait and see approach at that meeting and leave rates on hold at 4.75 %.

The market's conviction that last month's 50 basis point rate reduction from the Fed marked the start of a series of rate cuts has diminished sharply because of relatively firm US data and record oil prices. The Fed slashed its benchmark interest rate by 50 basis points last month to 4.75 % as it sought to restore market confidence following the onset of the credit crunch.

The market will now be refocusing on this weekend's G7 meeting of finance ministers and central bankers in Washington. With the US Treasury seemingly unconcerned by the slide in the dollar and the Europeans talking about the need to sort out global imbalances rather than direct comments on the US currency's weakness, market participants think little will be said in this weekend's communique.

Some exchange rates are mis-aligned, but the G7 have maintained the 'market-is-always-right' doctrine too long to do much about currency misalignments now and as a result, we will see another replay of the G7 pressing for more appreciation of the yuan, with the expected response from China.

Finally, the dollar fell against most other major currencies as Wall Street retreated over bad debt worries and surging oil prices. The Japanese yen gained across the board, pushing down the dollar. The U.S. currency hit a new 31-year low against the Canadian dollar before rising above Friday's level, and it dropped to 117.21 yen in late Monday trading, from 117.56 Friday.

The 13-nation euro moved as high as $1.4243 before settling back to $1.4200 in late New York trading. That put it within sight of its all-time high of $1.4282, reached Oct. 1, and above the $1.4176 it bought in New York late Friday. The U.S. dollar hit a fresh 31-year low against the Canadian dollar, falling to 97.03 Canadian cents before gaining back to 97.73 in late New York trading. On Friday, the dollar bought 97.36 Canadian cents.

The Canadian dollar achieved 1-to-1 parity with the dollar Sept. 20 for the first time since November 1976. Sentiment on long-term movement is divided, and investors await the Bank of Canada's interest rate decision today. The British pound advanced to $2.0424 from $2.0343.

Prices at the London open

GBPUSD – 2.0391
GBPEUR – 1.4356
EURUSD – 1.4200
GBPJPY – 239.33
GBPCHF – 2.4081
GBPAUD – 2.2647
GBPCAD – 1.9897
GBPZAR – 13.9266

Have a great day!

Christopher Huddleston
Sales Trader - FX & MM

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