Newsletter Issue 28 June 2010

Economic Overview

Key notes from Last Week

 It was a week of building risk aversion in an environment of high event risk.

• Some of the key developments include China’s surprise relaxation of the CNY peg, major medium-term fiscal consolidation plans by Japan and the UK plus a final US financial markets reform bill. While China continued to signal a willingness to allow the CNY to have more two-way flexibility, it also made it clear that there would not be any one-off revaluation or sharp appreciation. Long awaited medium-term fiscal reform plans were released on Tuesday, June 22, by Japan and the UK. Japan’s program had no major surprises because most of the major elements -- spending limit, limit on bond issuance and prospect for higher sales tax - had all be revealed ahead of time. The UK medium-term budget plan presented by Chancellor Osbrone was characterized by about 75-80% of the reduction coming from spending cuts and the rest for taxes. It is considered the most dramatic fiscal tightening in decades. The rating agencies also called the plan ambitious and if implemented would be consistent with an AAA rating.

• Spain and Greece passed key parts of their fiscal reform plans, including labor market reforms. Although investor risk aversion was high, there was continued easing of tensions in the interbank market. The decision by Spain and then the EC to publish bank stress tests (by end-July) no doubt has contributed.

• The FOMC was the only G7 central bank policy meeting -- no change. The cautious economic outlook however added to investor concerns about the global recovery. Perhaps the biggest surprise came out of the BoE minutes - a split vote 7-1 on the decision to leave rates unchanged -- the dissenting vote was in favor of a rate hike. This news added support to the GBP.

Regional Markets

Dubai's ruler said the emirate would go forward with all development projects within a year in an interview with CNN on Friday. "Everything we started, we are going to finish. Maybe some projects that we are thinking of, or in the books, might be delayed for 6 months, 8 months, 1 year, but the rest is going forward," Sheikh Mohammed Bin Rashid Al-Maktoum said. He also indicated he was not concerned about economic challenges in the OPEC member country.

Forex

EUR:  

1. The U.S. dollar fell against the euro on Friday as investors felt more comfortable buying riskier assets after stocks came off lows and commodities jumped.
2. However, funding issues in the euro zone are still an issue, as banks need to repay some 442 billion Euros in one-year loans to European Central Bank this week.
3. A weekend meeting of the Group of 20 rich and developing countries is unlikely to produce any surprises.

GBP:  

1. Sterling rose on Friday, supported by tough spending cuts announced by the new coalition government earlier last week and due to the overall weakness in the dollar.
2. Separately, The Bank of England outlined key risks to Britain's financial system in its half-yearly Financial Stability Report released on Thursday.

JPY:  

1. The dollar also fell against the yen, partly due to data which showed U.S. gross domestic product growth was slower than previously expected in the first quarter.
2. Dollar's fall against the yen on Friday was its fourth straight daily drop against the yen and, at 1.3% for the week, the third straight week of declines.

Derivatives

We continue to offer structured solutions for hedging FX Risk through FX Options and Interest Rate Risk through Interest Rate Swaps. Kindly advise us your exposures and requirements, so we may provide a suitable hedging strategy.

 ECONOMIC INDICATORS (28-Jun-2010/02 -Jul-2010)