Brave New World

Currency Update 14/07/2009

Most of the main G10 currency pairs traded in a narrow range today, despite plenty of potential market moving economic data and corporate earnings results. A bullish and, as it turns out, correct forecast of second quarter earnings for Goldman Sachs by Meredith Whitney on Monday helped equity markets rally. The British Pound and the Australian Dollar, currencies that are positively correlated to risk appetite rallied against the US Dollar on Monday. Today’s price action has been altogether more subdued.

In the US retail sales and PPI were, at first glance, better than expected. Retail sales rose 0.6% in June, although core sales rose by only 0.3%. Similarly, despite the producer price index rising to its strongest level since November 2007, the core index rose by less than one third of headline growth. The rise in oil prices by 10% in the last month has had a significant impact on both sets of results, providing a deceptive picture of the health of the US economy. By contrast the UK’s figures out today were altogether more upbeat. The RICS house price balance showed a reading of -18.1 in July compared with -43.8, the highest level since September 2007. Similarly, retail sales were better than expected, rising at an annualised rate of 3.2% compared with 0.8% in May. Cable hovered around the 1.6300 level. Sterling has benefitted in recent days from a return to risk appetite. The currency is vulnerable to corporate earnings news and global macroeconomic data. Given the amount of new information available to the market Cable has every chance of breaking out of the 1.6000- 1.6500 range.

The Eurozone fared worse yesterday, with the German and Euro ZEW investor confidence surveys showing a dip in expectations for the economy. Investor sentiment in Germany fell to 39.5 in July from an  expected 48, while across Europe the ZEW fell below expectations to 39.5, from a previous reading of 44.2 in June. European industrial production data also underperformed, to 0.5%, lower than the expected 1.5% consensus expectation.