Daily Forex Analysis by Finexo.com 18/03/2010

Past Events

• USD Ben Bernanke testimony to House Financial Services Committee
• USD PPI m/m, out at -0.6 versus expected -0.2%, prior 1.4%
• GBP Claimant Count Change, out at -32.3k versus expected 8.4k, prior 23.5k
• GBP MPC Meeting Minutes
• CAD Wholesale Sales, out at 3.0% versus expected 0.6%, prior 0.7%

Upcoming Events

• GBP Public Sector Net Borrowing (1030 GMT)
• USD Core CPI m/m (1330 GMT)
• USD Unemployment Claims (1330 GMT)
• USD Philadelphia Fed Manufacturing Index (1500 GMT)
• CAD Foreign Securities Purchases (1330 GMT)

Market Commentary

The Chairman of the US Federal Reserve Ben Bernarke has said the central bank is best qualified to oversee the largest financial institutions and should retain its oversight of smaller banks as well. The Fed’s “wide range of expertise” makes it “uniquely suited to supervise large, complex financial organizations and to address both safety and soundness risks and risks to the stability of the financial system as a whole,” Bernanke said in testimony yesterday to the House Financial Services Committee. The hearing is assessing the merits of proposed legislation to overhaul financial regulation in order to prevent a repeat of the crisis that prompted taxpayer-funded bailouts of firms including CitiGroup Inc and American International Group Inc.
Bernanke and regional Fed bank presidents are opposing efforts by Congress to remove much of the central bank’s supervisory role, saying such authority complements monetary policy. Bernanke said the Fed’s role as a supervisor of smaller banks “provides useful information about the economy and financial conditions throughout the nation.”

Wholesale prices in the US plunged in February by the largest amount in seven months as a large drop in energy prices offset higher food costs. According to figures released by the Labor Department yesterday wholesale inflation dropped 0.6% in February, much larger than the 0.2% decline economists had expected. Excluding food and energy, prices edged up a slight 0.1%, in line with expectations.

The deep recession and weak economic rebound are keeping inflation at bay and giving the Federal Reserve leeway to maintain record low interest rates in an effort to build momentum towards stronger economic growth. While overall wholesale prices have risen 4.4% over the past 12 months, core inflation, which excludes energy and food, has risen by a much more modest 1% during the past year. Updated monthly core CPI data is due out later today. As food and energy prices which are quite volatile are removed from the core figure it a much better gauge of overall inflation and a better way to judge the overall change in the price of goods and services purchased by consumers. The figure is expected to come out at 0.1%, from -0.1% last month.

Paul Dales, an economist at Capital Economics, said much of the downward pressure on prices stemming from the nation’s steep recession has yet to be felt. For that reason, Dales said the Fed will be able to keep interest rates low for many more months.

Other releases due in the US today are the unemployment figures showing the number of people who filed for unemployment assistance for the first time in the past week and the Philadelphia Manufacturing Index. Unemployment figures are expected to be relatively unchanged from the previous figure 456k.

North of the border, sales at wholesale level in Canada had their biggest jump in three years in January, adding to evidence inflation may be building as the economic recovery there gains momentum. Wholesale sales surged 3% to $44.4 billion, Statistics Canada said. In volume terms, sales rose 2.9%. The increases were across all sectors and all provinces of the country, except for Nova Scotia, the report said. Automotive parts, building materials, machinery and electronic equipment and “other products,” accounted for 80% of the growth, StatsCan said. Economists had forecast a sales gain of 0.5%.

The data follows figures for manufacturing sales, released on Tuesday, which also exceeded forecasts, giving a further push to the Canadian dollar on expectations for an early interest rate increase. Later today foreign securities purchases are due to be announced. In the past two months, foreign investors have shown growing confidence in the Canadian economy and a net purchase of over 10 billion CAD was reported. This time, the net figure is expected to be less than 10 billion CAD.

The Canadian Dollar is gradually edging closer to parity with its American counterpart. Yesterday gained a total of 0.33% against the US Dollar, to close trading at 1.0105 USD.

In the UK yesterday, the Pound rallied after it was announced that Bank of England policy makers had unanimously voted to keep their 200 billion-pound ($304 bn) bond purchasing program on hold for a second month. The nine-member Monetary Policy Committee, headed up by Governor Mervyn King voted 9-0 to maintain the current plan as there was “little evidence to suggest” a change in the economic outlook. The committee also unanimously voted to keep the key interest rate at 0.5%. The minutes of the March 4th meeting were published yesterday.
The Sterling rally was further boosted by the news that UK jobless claims fell unexpectedly in February, dropping at the fastest rate since 19997. The number of people receiving unemployment benefits dropped 32,300 from January to 1.59 million according to the Office for National Statistics in London. It suggests that the economic recovery is strengthening as Britain prepares for a General Election which is due to be held by June.
Sterling gained 0.56% against the US Dollar over the course of the day closing at USD 1.5317. It appreciated 0.35% against the Euro, closing trading at 0.9065 EUR.

Later today UK Public Sector Net Borrowing figures will be announced. Last month a drop in borrowing was expected but failed to materialize. This time borrowing is expected to rise from 4.3 to 14.5 billion pounds as a result of the UK budget deficit which is estimated to be in excess of 12% of GDP.

Finally, the European Union has criticized the UK and other European nations for having “optimistic” growth assumptions and bloated deficits. The UK must tackle “uncertainty” in plans to cut its deficit, the EU said. EU rules say government deficits must be below 3% of GDP, but the UK’s deficit is expected to hit £178bn this year. Germany, France, Spain and Italy were also warned they were over-reliant on economic recovery to meet debt targets. Brussels was commenting on plans by some of the biggest EU countries to bring down public spending.

Yesterday did not see the Euro move much against the USD, the Euro fell 0.2% to close trading at 1.3734 USD.

Written by Finexo.com