Thursday 23rd October 2008

A Brief Respite for Sterling Overnight …..

We open this morning with Sterling looking almost sprightly following a couple of failed attempts overnight to force the rate down towards the 1.60 support level. The fact that we bounced off 1.6150 a couple times makes that level a weak support for the moment but given current sentiment, is unlikely to provide significant resistance ahead of the weekend. The Yen remains the Market’s favourite for now with further gains provoking Finance Ministry comments already this morning.

JAPAN GOVT SPOKESMAN KAWAMURA: MUST CLOSELY WATCH HOW YEN RISE AFFECTS JAPAN ECONOMY

Well we know exactly how the strong Yen and the global downturn are affecting the economy.. 3 consecutive negative quarters for Industrial Production and very a very downbeat outlook from Sony gives us a bit of a clue.

Elsewhere the flight by investors/speculators (call them what you will) from commodities, commodity based currencies, stock markets and almost anything else that moves leaves us with a big question. Where on earth are these funds going? Given that yield appears no longer a priority then it might go someway to account for the stronger Yen and the very low level of short date Dollar rates. The Fed yesterday went someway to put a floor under the latter by tinkering with the formula by which they reimburse Banks’ excess balances held by the Central Bank. In theory good, in practice we have still seen overnight Dollars offered at sub 1% this morning.

The MPC minutes revealed that, as expected, the vote to cut rates was unanimous. Given the committee wide agreement on the current problems that best the UK economy, there is a great possibility that we see a further 50bp cut at the November meeting and expectations abound that we will have Base Rate at 3% by some time in the 3rd Qtr 2009. Given the magnitude of the expected total cut, one can see how short term investors are shying away from holding Sterling. On the other hand, there must be a growing feeling that buying Sterling here and locking in the higher yields down the curve would prove to be a good strategy going forward. We will see which sentiment prevails.

Very dovish remarks from ECB member Paramo - the ECB is in a position to cut rates without adding to inflationary risks in the medium term. Says the ECB takes its decisions on the basis of new incoming information.

In other interest news, the New Zealand Central Bank cut rates this morning by 100bp to 6.5% (as expected) and the Riksbank have also slashed rates by 50bp (definitely not expected). Both CBs, in their respective statements that followed the decisions, warned the Markets to expect further cuts over the coming months in the face of continued global slowdown.

Stock Markets in the US sold off last night with the DJIA down 5.7% and the NASDAQ off 4.77%. This trend continued into the Far East with the NIKKEI closing lower but pared losses from a new 5 ½ year low seen earlier in the day. The Hang Seng was also lower (down 3.22%) and also reached the dubious level of having lost 50% of its value from the year’s start. Europe also opening lower. The raft of US earnings scheduled for this afternoon will keep markets nervous. Microsoft, Eli Lilly, Sued-Chemie, UPS, Dow Chemical, Coca-Cola, NY Times, Chubb, Xerox. Eastman Chemical are all down to report.

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