Interest rates set to turn
The currency markets continued to show volatility with the interest rate and economic direction unclear in the US and the Euro zone, with a vast implication for the interest rate cycles in both the key blocs. The markets focus remains on the interest rate policies of the two key economic zones, as the ripple effect will be felt across the other G-7 countries and the emerging markets.
With the US Dollar reversing its recent trend of correction on comments by the Fed Chairman Ben Bernanke, the direction of the US interest rates is now looking for a hike next by end of 2008, with interest rates expected to climb higher in 2009. The tone of the Federal Reserve has changed from providing economic relief to the US in the wake of the mortgage crisis, to now fighting the resulting inflation from the sharp cuts in interest rates in the first half of 2008. The continued risk for the US remains on the unemployment front, where the seasonally adjusted unemployment rate rose to 5.5% in May from 5.0% in April ’08. The impact of this is on consumer spending, and retail borrowing which if it shows a marked slowdown would materially impact the GDP for 2008 as around two-thirds of the GDP growth comes from consumer consumption in the USA.
This effect is also being seen in the UK economy too where according to the BOE Governor Mervyn King, the (economy) “faces a period of rising inflation and falling economic growth”; growth is expected to slowdown to a 1% annual growth rate in Q1, 2009, which is the lowest growth since the last recession 17 years ago. Inflation in UK has risen to around 3% on the back of higher fuel costs; this is the upper end of the range for the Bank of England’s inflation target and a climb in interest rates is expected, with the potential to slide the economy further into a period of low growth or potentially atleast a quarter of negative growth. The Stg has made another attempt at the 1.9975 area and the fall back indicates lack of momentum to break it; this implies potential correction towards 1.9500, 1.9430, 1.9370 & 1.9200. Only a clear weekly closing above 1.9775 would indicate the Stg has the required buying support to take it towards 2.0020.
Usually we see the Euro-zone growth lagging the US and UK by atleast a year and the same expectations are for the economy post the recent upsurge in the growth. Inflation is climbing higher and we expect the ECB to step in with actions to lower the money supply growth, and the inflation hot spots within the economy. The Euro has made several attempt to break the 1.5770 area for a stab at the 1.5970/1.6010 level it touched in April this year. However, the currency does not seem to carry the steam for it, and expect a closing below 1.5560 to drive it lower towards 1.5490, 1.5380, & 1.5100. Against the Stg, the Euro looks for a range to be maintained between 1.2460-1.2685 with little changed in the status quo.
The Japanese economy has been seeing some volatility which has been coming off and we see the Yen looking to follow the trend of a stronger dollar. The $/Yen has broken out of a range of 104.90-105.40 and the recent move towards 107.50 leaves the move to hit resistance levels of 108.35, 108.90, 109.45 & 110.05. The potential to touch 111.30 & 112.50 does exist in a sharp move, in case of a break of 110.05. The Eur/Yen cross is seeing some attempt at its earlier high of 166.15 and a break of this would see it attempt 167.55 & 169.00, its previous high reached a year ago. Stg/Yen is also looking for a clear break above 210.00 for a move to a new range of 207.65-214.50 with a potential to break the upside.
Look for potential turning points for the US Dollar with the US authorities now calling for a stronger Dollar, a clear reversal from their earlier position of a weaker dollar. The impact of higher oil, commodity and agricultural prices are driving inflation within the global economy which will impact all, the consumers and the producers alike. This decade will probably be remembered for the moment when the humble farmer finally became king.
The Author is Head of Mashreq Gold & Investments with Mashreq. Views expressed are his own and not necessarily those of Mashreq. Data and comments are as of 11thJune, 2008.
US Unemployment Rate Years 2000 - May
Eur/US$: June 07-June 08
Courtesy of MoneyWorks