Tuesday 12th August 2008

In overnight trading, the RICS House Price Balance from the UK declined less than expected in July, printing at -83.9% versus -90.0%. On balance, the improvement is marginal considering the magnitude of the decline in prices. Real estate demand has collapsed as buyers are unable to obtain credit to finance purchases. Indeed, June’s Mortgage Approvals dropped to the lowest level since at least 1999.

The U.S. dollar is maintaining a timely advantage over major currencies, as the job done by the Federal Reserve and the Treasury department to stimulate growth is beginning to produce some results. Crude receding from recent highs (5-month low yesterday at $112.72) should support the currency over the short/medium term, while bad economic numbers are already discounted in recent lows. The European officials, at the contrary, prefer to adopt a wait and see approach.

Data released yesterday showed a record surge in the cost of production in the UK and reinforced the expectations that the inflation headline will hit 5 % over the summer. The Bank Of England is largely expected to make a harder stance in its inflationary report. Some traders are of the opinion that the BOE has no other choice but to cut interest rates, rise inflation expectations and downgrade economic growth this year and next year in spite of mounting fears of recession.

Aside from the much headlined UK Consumer Price Index where expectations are for a 4.2% rise, the market will likely pay closer attention to the continued slide in oil prices as well as the escalating conflict between Russia and the Caucasian republic of Georgia. The dollar tends to attract capital at times of geopolitical tension because the US remains the dominant global military power.

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