Friday 11th July 2008

This has been a very quiet week on exchange rates with the lack of stimulus causing little movement. There have been a few flurries in EUR/USD caused by oil prices firming once more following their dip on the Hurricane Bertha assessment and the weakening in GBP/USD has been largely due to continued bad news on the economy and equity sell off. The UK is now officially 63 weeks into a Bear market on equities, one of the longest in recent history. Current thinking is that if we do see a turn round in sentiment the bounce is likely to be fairly weak. Any good news this week was countered by bad news which just left FX markets where they started.

In the UK yesterday we saw the MPC hold interest rates at 5% with the expectation of an 8 -1 vote to leave rates on hold, the one likely dissenter being Blanchflower who, as an arch-dove, would have voted for a 25bp cut we think. We will see the actual result and any comment when the minutes are released on 23rd July.

In the middle of next month we will see the Bank of England release their Inflation report, so it is very likely that rates will remain on hold at the August 6/7 meeting ahead of this. The Swap market is still anticipating there being a 34% chance of a rise in rates of 25bp by the end of the year. However, the economy and market analysts are arguing that there will be a stronger chance of them being cut with pressure being exerted by an ever weakening economy.

Onto the US, we are still seeing Freddie Mac and Fannie Mae under pressure with the concern focusing on how much they need to raise to prevent them from collapsing. A report in the New York Times today talks of the 2 mortgage providers being rescued by the US Government to protect the trillions of US Dollar mortgages that they support. This report underpinned both the Dow Jones and the US Dollar.

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