Kiwi enjoys steady gains as risk makes a slight return

The pound slid back over half a cent against the kiwi yesterday as investors showed slightly more appetite for risk assets in the wake of positive US data.

• A raft of positive data in the manufacturing, construction, and housing sector’s yesterday raised confidence over the health of the global economy, benefiting higher-yield currencies.
  
• The kiwi also found support after the country’s Treasury said it expected the economy to grow at an annualised rate of about 2% in the second half of the year.
  
• Conversely the pound slipped back in trading, undermined by market speculation that the Bank of England would agree to extend their quantitative easing programme on Thursday.
  
• Data released yesterday morning revealed that growth in the UK’s manufacturing sector is accelerating, but the market appeared to shrug off the positive data, suggesting that investors are unlikely to take up sterling positions ahead of the BoE meeting later this week.
  
• The kiwi is continuing to trade strongly this morning, up a further 0.3% on sterling, bringing the price back below 2.28.

The aussie rally surges to a halt as the RBA caution against further rate increases in the short term

The aussie climbed over a cent, or 0.8%, against the pound in trading yesterday as the market priced in an interest rate increase in Australia.

• The aussie led a strong rally as investors positioned themselves for the rate decision from the Reserve Bank of Australia, with most anticipating a increase of 25 basis points.
  
• Although there were few still expecting the RBA to raise rates by 50 basis points following benign inflation data last week, investors were encouraged after, the Australian government on Monday upgraded its economic outlook, forecasting 1.5% annualised growth by the end of June 2010.
  
• Overnight the RBA did raise their rates by 0.25%, with the current interest rate now reading 3.50%, however the aussie has actually backed off following the news as the accompanying statement was not as hawkish as some had expected.
  
• With a rise already priced in, the aussie had little more to gain following the decision, but although it has dipped slightly, down 0.2% against the pound this morning, analysts note that with more rate increases to come the currency should remain well supported.

A brief return to risk appetite enabled the euro to post gains against the US dollar

The single currency gained half a cent on the dollar in trading yesterday as positive US data weakened demand for the haven currency.

• In early trading, a report showing China's manufacturing accelerated at its fastest pace in 18 months in October weighed heavily on the dollar as the positive news encouraged investor to buy into higher-risk currencies.
  
• The greenback lost further ground after the Institute for Supply Management's index of business activity rose much more than anticipated in October.
  
• US Manufacturing ISM rose to 55.7 in October, from 52.6 in September, well above the 53.3 reading expected by market analysts. Furthermore, pending home sales increased at a 6.1% pace in October
  
• This data, along with reports showing rising construction spending, helped stocks extend gains as investors increased their risk tolerance, detracting from the dollar's safe-haven appeal.
  
• The pair are trading steadily in this morning’s session, holding around the overnight closing price of 1.4765 as investors caution against taking positions ahead of central bank meetings in the US and EU.

Positive economic data in the US failed to buoy demand for the broadly weaker sterling

Positive UK manufacturing data was unable to offset bearish sentiment toward the pound yesterday with the US dollar closing 0.3% up.

• Sterling opened under heavy pressure yesterday as the markets speculated that the BoE would decide to inject further monetary stimulus into the economy at their next meeting.
  
• The pound was able to trim early losses though after a stronger-than-expected reading of UK manufacturing activity showed the sector expanded after prolonged weakness.
  
• The PMI index rose to 53.7 in October from an upwardly revised 49.9 in September, signalling the fastest pace of growth since November 2007 and beating forecasts for a rise to 50.1.
  
• In the afternoon, the pound recovered further ground as a raft of US economic data on manufacturing, construction, and housing showed more evidence of a recovery in the world's largest economy, encouraging investors to buy riskier assets.
  
• However, despite positive data, the pound was unable to make gains, still closing nearly half a cent down on the day as investors clearly remain cautious ahead of important central bank meetings this week.

Sterling under selling pressure as the market prices in an increase to QE

Sterling slipped yesterday, snapping a 5-day consecutive climb against the euro as traders braced for the possibility that the BoE may announce an extension to quantitative easing.

• The pound was broadly sold in trading throughout the day in spite of data showing that recovery in Britain's manufacturing sector was accelerating.
  
• The Chartered Institute of Purchasing and Supply said its composite index of manufacturing activity rose to 53.7 in October, following two-consecutive months of declines
  
• Investors appeared unconvinced, however. Improvements in purchasing managers' indices between March and July had prompted many to think the UK economy would have returned to growth in the third quarter, only to be disappointed by last month's negative GDP reading.
  
• The markets were particularly bearish towards sterling as they speculated that the BoE will announce a continuation of their asset purchasing scheme at their meeting later this week, which enabled the single currency to gain.
  
• Sterling was also under pressure from the looming announcement of a banking sector shake-up as the government finalises plans to carve up rescued banks RBS and Lloyds.

The kiwi retreated at the end of last week on a rise in risk aversion

The kiwi dollar struggled on Friday enabling the pound to jump 1.4%, briefly nearing the 2.30 level, as risk appetite in the market waned.

• Higher-risk currencies struggled to make headway at the end of last week as the rally in global equities in the wake of the positive US GDP data came to an abrupt halt.
  
• As global stocks fell, investors sought shelter in the haven currencies fuelling a sell-off in the higher-yielding kiwi dollar, buoying the sterling price.
  
• In trading this morning, the New Zealand dollar has pulled back from six-week lows against the pound, with profit taking in high-yield currencies taking a pause.
  
• Support has also come from improved manufacturing data in China, a key importer of New Zealand goods, which has outweighed some of the negative sentiment toward the currency.
  
• Analysts have noted though that reduced support for a rise in interest rates and lower risk appetite may prevent the kiwi from regaining its strong valuation.

Having weakened off sharply on Friday, the aussie is trading strongly against the pound this morning

The pound climbed just over two cents against a broadly weakened aussie dollar on Friday with a rise in risk aversion putting selling pressure on the higher-yielding currency.

• Weak data in the US and plummeting global equity markets enable the pound to gain as investors took the opportunity to cash profits in the aussie and retreat to safer assets.
  
• Analysts have recently noted that the rally in risky assets could come to an end. Conditions for perceived riskier assets to gain requires a flow of positive economic data combined with loose global monetary policies and low interest rates.
  
• The strong US GDP figure supported the rally in higher-yield currencies, but as the economic recovery shifts the balance in favour of tightening policy, it will likely signal the end of the rally in risky assets.
  
• However, the aussie is trading strongly again this morning, currently up over a percent, as investors bet that the Reserve Bank of Australia will raise interest rates at their meeting on Tuesday.
  
• Traders also said that Chinese data showing manufacturing activity at an 18-month high helped to mitigate some of the recent loss in risk appetite, bolstering aussie demand.

The euro lost ground to the dollar on Friday as the rally in equities came to a halt

The dollar strengthened, consolidating after broad selling on the back of data showing strong US growth, gaining over a cent on the single currency.

• Equities took a sharp downturn at the end of last week, having rallied after the positive US GDP data, most likely as a result of end of month profit taking, which buoyed demand for the greenback.
  
• Data also showed that US consumer spending fell for the first time in five months in September, coinciding with the end of the government's car scrappage scheme.
  
• The US Commerce Department says spending dropped 0.5% in September, compared with a 1.4% rise in August, which encouraged investors to buy back into the haven currency.
  
• The US dollar extended gains in the afternoon, pushing the euro down near three-week lows after data showed that a US Midwest manufacturing index was stronger-than-expected failed to heighten risk appetite.
  
• The euro has climbed in trading this morning with the price currently hovering around the mid 1.47 mark.

Dollar was buoyed at the end of last week as risk appetite waned

The greeback pulled back from its sharp sell-off on Thursday, as weak US economic data spurred a return to risk aversion.

• In early trading, the dollar continued to lose ground following the better-than-expected US growth data, however the GBP/USD rally was capped at 1.6600, and the UK currency pulled down steadily, eventually closing down 0.6% ay 1.6448.
  
• US markets went through losses on Friday, with financials and materials leading the path, as risk aversion returned after Thursday's optimism, strengthening support for the greenback.
  
• On the macroeconomic front, data revealed that US consumer spending declined 0.5% in September, the largest decline since December 2008, further buoying the dollar rally.
  
• Positive manufacturing data from the Midwest in the afternoon failed to dent dollar buying in the markets and traders acknowledged that part of this may have been due to month-end flows into the US currency related to foreign portfolios.
  
• The US currency has continued to climb in trading this morning, currently half a percent up, as investors remain cautious ahead of big events this week, including interest rate decisions in the UK, eurozone and US.

Pound edged up slightly against the euro on Friday but is down around 0.7% in trading this morning

The pound edged higher, achieving its biggest weekly advance against the euro since January, as signs pointed to the UK economic recovery talking hold.

• The pound/euro pairing was little changed at the end of last week, though sterling did creep up, supported by reports showing gains in consumer confidence and UK house prices.
  
• Month-on-month property prices were up for the sixth consecutive month in October and were 2% higher than in the same month the previous year. However, the pace of monthly price rises has eased, going up by just 0.4%.
  
• Meanwhile in the eurozone, data revealed that the unemployment rate rose to 9.7%, in line with market expectations, which raised concerns that recovery could still be destabilised, dulling demand for the euro.
  
• Last week the Bank of England completed its £175 billion asset purchase programme and so investors are now looking toward an extension of QE in their meeting this week.
  
• Analysts have noted that until the market is confident the BOE is done with quantitative easing, it is going to be very difficult for sterling to rally significantly from current levels.