Close Brothers - FX OUTLOOK 17/10/2007

Close Brothers - FX OUTLOOK 17/10/2007

The dollar came off its day highs after data showed the summer's financial market turmoil led to the largest ever monthly outflow of capital from the US during August, as investors rushed to pull their money out of dollar-denominated assets. Treasury International Capital figures showed net foreign long-term securities purchases amounted to minus 69.3 bln usd in August, the largest outflow ever following three months of declining capital inflows.

The figure should bounce back next month when the market turmoil has died down. However, the fact that so many people shifted out of dollar-denominated assets is likely to weigh on the currency going forward. The data will not take away from the bearish mood surrounding the dollar – it is very posible that it could depreciate further in coming months.

US industrial production figures out yesterday afternoon, however, had little impact on the dollar, with output rising 0.1 % during September compared to August, in-line with expectations. Meanwhile a dip in risk appetite, precipitated by poor US corporate earnings reports weighing on equities, political tension between the US and Turkey and rising oil prices has helped support the yen and weighed on the Australian dollar. This is because of an unwind of the carry trade, a risky strategy where investors sell low-yielding currencies such as the yen to invest in high-yielding ones elsewhere such as the Australian currency.

Elsewhere, the pound has steadied against all major currencies after falling in early trade yesterday following the release of figures showing UK inflation remained well below the Bank of England's target during September. The Office for National Statistics said the annual CPI inflation rate remained at 1.8 % in September, the same rate as in August, against expectations for a slight rise to 1.9 %. This means CPI has fallen below the BoE's 2.0 % target rate for three months running and has weighed on the sterling because it raises expectations that UK interest rates could be cut before the end of this year.

Today sees the release of the minutes to the Bank of England's October interest rate decision when borrowing costs were left on hold at 5.75 %. Markets will be watching closely for any signs that members of the Monetary Policy Committee are becoming more inclined towards cutting interest rates.
Finally, the Canadian dollar ended slightly lower yesterday, after the Bank of Canada's interest rate statement offered no fresh incentives for taking on new positions in the currency, and similarly commodity-linked currencies such as the New Zealand and Australian dollars sank on renewed risk aversion.
In keeping its benchmark overnight interest rate target unchanged for a second consecutive decision date at 4.50%, the Bank of Canada conformed with market expectations, even if its accompanying statement struck many as being slightly on the dovish side and suggestive of the Bank's next move being an eventual rate cut.
Prices at the London open
GBPUSD – 2.0313
GBPEUR – 1.4314
EURUSD – 1.4190
GBPJPY – 236.49
GBPCHF – 2.3937
GBPAUD – 2.297 8
GBPCAD – 1.9909
GBPZAR – 13.9392

Have a great day!

Christopher Huddleston
Sales Trader - FX & MM

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