NBK Weekly Money Markets Report dated 11-10-09

Published October 12th, 2009 - 11:57 GMT

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As at Sunday October 11th, 2009

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A Weaker US Dollar

The foreign exchange market witnessed major moves in the performances of the major currencies. The changes were mainly driven by the central banks’ meetings in Australia, Europe and the United Kingdom. The US Dollar’s performance was weaker against all other major currencies, due to an increase in demand for higher yielding currencies, as the dollar has become a carry trade currency. The Sterling Pound was the smallest winner in last week’s trading, although it reached a high of 1.6120 on Thursday, but finished the week at a level of 1.5839. The Euro started the week at around the 1.4600 level, and reached as high as 1.4818 during the week, before ending at 1.4733 on Friday. The Japanese Yen is still consolidating below the 90.00 barrier, and it seems that the Bank of Japan will not intervene to weaken the currency. The currency failed to break the 88.00 barrier twice in intraday trading, and closed at a level of 89.80. The biggest mover was the Australian Dollar, following the Reserve Bank of Australia’s surprising interest rate hike; the Australian Dollar managed to strengthen last week, reaching a 14-month high of 0.9090 on Thursday, and ending the week at 0.9040.

Gold - Climbing

Gold prices broke new records last week, reaching an all-time high of $1061.55 per troy ounce during trading on Thursday. The surge in the commodity price is not linked to supply shortage or demand outbreak; the rally is mainly attributable to the weaker US Dollar trend in the FX markets. Another major factor driving the price up is the fear of inflation in major worldwide economies, which is pushing investors around the globe to hedge that risk by buying the world’s oldest currency, gold.

Mixed Data

US Service industries expanded in September for the first time in a year, as the emerging recovery spread from housing and factories to the broader economy. The Institute of Supply Management (ISM) Non-Manufacturing index rose to 50.9, 2.5% higher than the 48.4 registered in August, indicating growth in the non-manufacturing sector of the economy after 11 consecutive months of contraction.

Initial jobless claims fell lower than expectations to 521,000, from a previous 554,000 the week before, as shown by the labor department data. This figure is the lowest since January, and shows that the labor market is deteriorating at a slower pace as the economy emerges from the recession. The total number of people collecting unemployment insurance dropped to its lowest value since March, to 6.04 million.


ECB Interest Rate Decision

The European Central Bank did not change their interest rate on Thursday, keeping the rate at 1.00%. There are signs that the economy is starting to grow again but questions persist over how strong and sustained the evident recovery will be. “We have ahead of us a bumpy road, even if we are out of this free fall”, President Jean-Claude Trichet said in a press conference in Venice, The statement led many economists to conclude that the central bank will not raise its key interest rate until the middle of 2010.

Europe’s economy contracted more than estimated in the second quarter as consumer spending, investment and exports were weaker than earlier reported. The Gross Domestic Product (GDP) in the 16-nation Euro region fell 0.2% quarter-on-quarter and 4.8% on an annual basis. The decline was sharper than the 0.1% decrease estimated earlier. While the Euro-zone economy is gathering strength after governments injected billions of Euros through tax cuts and spending incentives to fight the worst recession since World War II, the International Monetary Fund (IMF) projected that Europe’s recovery will be “slow and fragile”.

Other Numbers

The confidence in the Euro-zone’s economic recovery may be at a year-high this month, but economists remain cautious about the expected recovery’s sustainability in the middle of slowing consumption and the ongoing rise of unemployment. The Euro-zone services sector expanded in September as the Purchasing Managers Index (PMI) for the services sector rose to 50.9, from 49.9 in August. The boost in the index came mainly from an increase in new orders and business optimism.

United Kingdom

BoE Interest Rate Decision

The Bank of England left its key interest rate unchanged at 0.50% for the seventh consecutive month, as widely expected. However, although many believe the economy has stopped its contraction in the third quarter, there is still little optimism that the recovery is sustainable. The British Chamber of Commerce is therefore pushing for an increase in the Bank of England’s Quantitative Easing program to ₤200 billions from the initial ₤125 billions, in an effort to reinforce any recovery in the economy.

Services Sector Still Improving

The services industry in the United Kingdom, from banks to caterers, expanded at the fastest pace in two years in September, adding to evidence that the economy emerged from recession in the third quarter. The PMI services index in the United Kingdom rose to 55.3, the most since September 2007, from an earlier 54.1 in August. The services sector has been in expansion since the index passed the 50 barrier in May, which marks the boundary between contraction and expansion.

Global News

The Reserve Bank of Australia Surprising the World

The Reserve Bank of Australia raised its key interest rate by 25 basis points to 3.25%, making history by being the first G20 country to take the initiative. The rate hike came after recent data showed the economy is improving sending the Australian Dollar to a 14-month high against the US Dollar to reach 0.9090 after the announcement.  This level is the highest since august 6th 2008. The central bank’s governor, after unexpectedly raising the key rate, stated that the justification for a benchmark rate at a half-century low “has now passed”, and did not rule out the possibility for further increases in coming months.


The Kuwaiti Dinar at 0.28650

The USD/KWD opened at 0.28650 on Sunday morning, following the Dollar performance during the week.









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