NBK Weekly MM Report dated 25-07-2010
Greenback Continuing to Lose Ground
The US Dollar continued to fall against the major currencies in the past week due to lower than expected economic releases from the US. The Euro reached a high of 1.3028 as investors shifted their focus from the debt-crisis towards improvements in economic activity, then closed the week at 1.2906. The Sterling surged after the release of a better than expected GDP report reaching a high of 1.5449 to close the week at 1.5439. The Japanese Yen reached a week-low of 87.58 and a week-high of 86.32 before closing at 87.50 on Friday. The Swiss franc reached a low of 1.0562 at the beginning of the week and a high of 1.0391 before closing at 1.0534.
The Fed Chairman Mr. Ben Bernanke said that the outlook over the US economy is “unusually uncertain” and that the Fed is willing to take more actions if growth proves to be weaker than expected. In his testimony to the congress, the Fed Chairman listed three possible steps the Fed might implement such as changing monetary-policy statements’ “extended period” language, cutting the interest paid to banks for their excess reserves and taking further action on the balance sheet.
The number of Americans filing for unemployment benefits rose more than expected last week, signaling again that the labor market strength remains a major hurdle for a further economy expansion. Initial jobless claims rose to 464,000 from the previous 427,000 exceeding the expected rise to 449,000. Economists projected that the lack of jobs will restrain spending, the largest part of the economy, and lead to slower growth in the second half of the year.
Housing Numbers on the Downside
Sales of previously-owned homes in the US dropped in June for a second month, adding to evidence the market will fall as the effects of a federal tax credit fade. Purchase of existing houses dropped to 5.37 million from the previous 5.66 million in May. Another index showing the effect of the expired government tax credit is the House Prices Index, which fell to 0.5% from the previous 0.9%.
Stress Test Results
Only 7 out of 91 European banks failed a long-awaited stress test, a result undermining the credibility of an exercise designed to restore the market’s confidence in the Eurozone banking sector. The list of failing institutions included 5 local Spanish savings banks, 1 Greek and 1 German bank. The Committee of European Banking Supervisors said the overall capital shortfall is at €3.5bn.
Consumer and Business Confidence
Consumer Confidence in the Eurozone improved significantly in July. The consumer confidence index increased from -17.3 to -14.1 during the month, benefiting from signs of easing in the European debt crisis. In addition, German business confidence surged unexpectedly to a 3-year high in July after exports boomed and economic growth accelerated. The IFO business climate index jumped to 106.2, the highest since July 2007, exceeding market expectations of a decline to 101.5.
Manufacturing and Services PMI
The Eurozone’s private sector surged ahead this month, conflicting with expectations of a slowdown in growth and concerns about a double-dip recession. Both the manufacturing and services PMI outpaced expectations of a monthly drop. The Flash Manufacturing PMI index rose to 56.5 in July from 55.6 in June, exceeding expectations of a drop to 55.2. Similarly, the Flash Services PMI index jumped to 56.0 in July from a previous 55.5 in June, surpassing expectations of a drop to 55.0. In parallel, German Manufacturing PMI rose higher than expected to reach 61.2 in July from a previous 58.4 in June. Finally, the German Services PMI rose to 57.3, higher than the previous 54.8. Germany’s economic activity supports again that the country’s recovery remains on track despite the sovereign debt crisis.
Higher Industrial New Orders
Eurozone industrial new orders rose in May at their fastest annual rate in 10 years, outpacing expectations and pointing to economic recovery despite the area's debt problems. Industrial new orders in the 16-country zone increased by 3.8% month-on-month and 22.7% year-on-year. The annual gain was the largest since May 2000, and above market expectations of 20.2%.
Gross Domestic Product
The United Kingdom’s economy grew by nearly twice as much as anticipated by the market in the second quarter, its fastest pace of expansion recorded in the past 4 years as a rebound in services, manufacturing, and construction ignited the recovery. The UK GDP rose 1.1% in the second quarter after previously increasing 0.3%, exceeding market forecasts of a 0.6% gain.
The United Kingdom’s retail sales rose more than anticipated in June, as the world cup triggered purchases of electronic goods in shops and department stores. Sales in the UK rose 0.7% on a monthly basis, above the expected gain of 0.5%, indicating that consumer spending may be strengthening after unemployment fell as the recovery gained momentum.
MPC Meeting Minutes
The Monetary Policy Committee minutes revealed that one member, Andrew Sentence, voted to increase the benchmark rate, which was kept at 0.5% as widely expected by the market. In addition, policy makers discussed the possibility of restarting the £200 billion quantitative easing program amid outcomes over the past month that signaled that growth might be slowing down.
Bank of Japan Meeting
Members of the Bank of Japan's monetary policy board showed that the bank remained wary of the fiscal problems that continue to plague Europe. The members also felt that the Japanese economy might face downside risks later this fiscal year as volatility in the stock market may weigh on consumption. In order to combat these risks, the Bank of Japan at the June’s meeting decided to provide loans to commercial banks at the benchmark interest rate to spur lending. The central bank maintained its key interest rate at a record low of 0.10%.
Dinar at 0.28800
The USDKWD opened at 0.28800 on Sunday morning.
Rates - 25 July 2010
Previous Week Levels This Week’s Expected Range 3-Month
Currencies Open Low High Close Minimum Maximum Forward
EUR 1.2904 1.2730 1.3028 1.2906 1.2750 1.3200 1.2920
GBP 1.5277 1.5123 1.5449 1.5438 1.5300 1.5750 1.5450
JPY 86.46 86.32 87.58 87.51 86.00 89.00 87.40
CHF 1.0492 1.0391 1.0562 1.0534 1.400 1.0700 1.520