CURRENCY MARKET REPORTS

Good morning.

It would be remiss of us not to start with the British Prime Minister’s astonishingly naïve suggestion to the G20 this weekend that a tax should be imposed on financial transactions. That, effectively, resurrects the idea of a tax on all currency trading to reduce speculative flows, while using the proceeds ‘to reduce disease and poverty’. This proposition was originally put forward by Nobel-winning economist James Tobin, when the Bretton Woods system of gold convertibility ended in 1971. The latest ‘version’ suggests that the tax should be 0.1-0.25%, instead of the original 1%. Its proponents also claim it will bring an end to global warming and, of course, the likelihood of future financial crises!

These ambitions at face value may be laudable; but they are not practicable. Perhaps it’s a good thing the US has already said it is not prepared to support a ‘day-by-day’ financial transaction tax – because without completely widespread global cooperation, such a tax would simply move foreign exchange trade to different centres.

London is the biggest centre for foreign exchange trading, sitting as it does in two time zones. But that status was boosted by bad regulation in the United States. Hence, we saw the beginnings of the ‘offshore’ eurodollar market and, given such a running start, massive growth in the less regulated market in London – after UK exchange control was abolished in 1979.

In the unlikely event that the tax is imposed around the world, then yes, speculative flows would be reduced. But lower volumes would mean less liquidity, which would ultimately lead to increased volatility, wild swings in prices and rising costs for commercial players.

That said, we must address ‘what next’ in the marketplace – while it still exists.

At the start of the week, we will see and hear from various finance misters as they are ‘doorstepped’, both arriving at and leaving the various meetings that tend to follow on from any of the ‘G’ meetings. Today and Tuesday, they will variously be at the BIS Global Economy meeting, the Eurogroup Finance Ministers meeting and at least represented at the EU Economic and Monetary Affairs Committee. By the time these are done and dusted, we should see Tobin put back in the filing cabinet for use on another occasion.

In the meantime, one of the first possible market influences will have occurred by the time you read this. At 03:20GMT, Reserve Bank of Australia (RBA) Assistant Governor Low will make a speech at the ‘In the Zone’ conference, hosted by the University of Western Australia. But with the market now looking for another rate rise from the RBA in December, only if he says something to make the market change stance will we see a lead from there.

At 07:15GMT, European Central Bank (ECB) board member Stark – a bit of a hawk on monetary policy – will speak on the same subject at the University of Tuebingen. So soon after last week’s ECB meeting, there shouldn’t be too much market impact, though the timing of his speech – as early traders decide on their opening stance for the week – makes this potentially more important than usual.

With no significant data from the US or the UK today and, indeed, nothing of note from either until Wednesday for the Bank of England inflation report, those traders will really be looking for a ‘hook’. If that hook is not following the antipodes, Asia or early speakers, then for some it will be eurozone data. Even here, the lead might not be obvious until late in the morning.

Though there will be French business confidence and the German trade balance to keep some interested early, it’s not until 11:00GMT that we will see German Industrial production for September. This number should be the second straight month on month rise, but we would only expect the market to sit up and take notice if we see a 2%+ reading.

So, once more we hold up our hands and say – what are equities doing? The ‘risk on/risk off’ pattern is likely to persist, with firmer equities leading to a softer dollar and easier stocks to dollar buying. However, we will also see an added influence from M&A activity. Here, we have reached deadline day for Kraft to ‘put up or shut up’ and so we expect to see a renewed ‘but this time hostile’ bid for Cadbury. Current market opinion is that this bid will not be much of an improvement; but if we are surprised and see a bigger cash element than the current 300p/share, then this might encourage some pound buying.

The performance of sterling has caught quite a few off-guard recently, with the pound recovering better than had been anticipated versus the single currency. As such, though technical studies would encourage more pound buying on a break up through 1.12 towards the ‘big target’ of 1.14, we would feel more comfortable switching sterling shorts from that cross into short cable positions. A push back below 1.65 is quite likely to encourage others to join that bandwagon.

MoneyCorp