Sterling sellers may want to do so early in the day

FX Market Overview

UK inflation picked up in November to 3.3% on the annualised Consumer Price Index measure. That is above most analysts forecasts and prompted yet more debate over why the Bank of England is so sanguine about inflation overshooting their 2% target when, officially, keeping inflation above 1% and below 3% is their only remit. The uptick in inflation certainly pulled the rug from under any plans the BOE had to expand the money supply and that, in turn, pulled the rug out from beneath the Pound which fell against all other currencies after the news. The Pound bounced back a little later in the day but whether today’s unemployment numbers will improve or compound the Pounds problems is open to debate. The consensus forecast is for a small fall in the unemployment numbers but beware of a nasty surprise in these figures because news of fresh hiring is slim. Sterling sellers may want to do so early in the day.

Yesterday’s other big news was the UK Federal Reserve’s interest rate and money supply decisions. In the event, they chose to keep both the base rate and the level of money supply on hold at current levels and warned the markets to expect little change in either aspect for some considerable time; the Dollar reaction was understandably muted. However, the Dollar did receive some good news in the form of the fifth straight month of retail sales growth. That caused a flurry of forecast rewriting as analysts upped their US growth forecasts for the 4th quarter.

That improvement in America’s fortunes was also felt in the value of the Canadian Dollar which strengthened through the day. The Canadian Dollar does have some correlation with commodity markets and silver rallied overnight on rumours that JP Morgan was unwinding some of its ‘short silver’ positions. In essence, having allegedly set themselves up for a fall in the value of silver, JP Morgan’s traders are now reversing that trade as they see silver advancing. This is all rumour and speculation but it could be true and would certainly explain the rise in the silver price. Whatever the facts behind it, rising commodity prices will tend to boost the value of the Canadian Dollar as well as the Australian and New Zealand Dollars and the South African Rand.

In Europe, apart from the continued debate over the Euro’s potential collapse and all manner of views on the ability of the European Union and International Monetary Fund to maintain stability in the Eurozone, the data was pretty uneventful. Eurozone industrial production rose 0.7%, largely in line with forecasts and certainly not enough to cause any wild gyrations in the value of the Euro. We are expecting a small decline in EU employment to be announced today so the Euro could weaken this morning after having a rather good spell in the last few days. That spell was cut short by credit ratings agency, Moody’s which suggested they were undecided whether to downgrade Spanish debt. None of the Euro movement appears to have anything to do with the Italian Prime Minister keeping his job although I am sure Italian escort agencies will be relieved along with the Italian press who would have very little to write about if Mr Berlusconi wasn’t around.

We heard overnight that the well respected and widely followed Japanese Tankan survey showed the first drop in business confidence in 7 quarters. Clearly the very strong Yen was bound to have an effect on exporters and Japan survives through export sales so the markets shouldn’t be too surprised by the report but the fact that the future expectations element of the report shows that Japanese businesses expect conditions to worsen should worry the Japanese authorities.
Today’s data diary overfloweth with treats. As well as those already mentioned, we also get US inflation data, US industrial production and the NAHB housing market index. Plenty to keep US dollar traders busy. It will be another volatile day; good news all round.

While we await the first data release of the day, it is worth noting that the resurgence in the share markets and a recovery in bank profits mean it looks like British taxpayers will get back all the money sunk into RBS and Lloyds at the height of the credit crunch. That may not be a funny story to end on but it is good news.

I'll finish with the story of a chap who faked his own death in order for his wife to claim £1.25 million in life insurance but who was caught out when fingerprints on the forged death certificate were found to be his own. His wife who apparently helped in the scam has been arrested but the chap; Alfredo Sanchez, is still on the run with his children. poor planning Alfredo. Next time you die, don't touch the death certificate after the event eh!

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