Newsletter Issue 5 July 2010

Economic Overview

Key notes from Last Week

The risk retreat continued last week as investors shifted their concern from the funding of EC banks and EC sovereign debt issues to the prospect of a double-dip recession.

• The major economic data were skewed to the weak side. In particular, the larger than expected declines in China’s manufacturing PMIs (official 52.1 from 53.9,), US to 56.2 from 59.7 and the global index to 55.0 from 57.0. Add to this the weaker than expected US June consumer confidence (52.9 vs. 62.7 in May), pending home sales (-30%) and June payroll (-125K) data. Last week, Europe’s data appeared less concerning relative to the unexpected weakness coming from what had been considered the stronger performing economies --China, Japan and the US. Weak data and high level of investor risk aversion translated into sliding equity markets (Asia down 4% on the week, Europe down 4.5% and US headed for about 5.4% decline). Gold took a very sharp 3.5% decline to a low of $1196.65 on Thursday and ended the week at about $1210, down 3.6% on the week. Oil is off about 8.6% on the week at $72.

• Because of the relatively weak US data, there was also shift in currency markets away from the USD in favor of the EUR. It should also be noted that the CNY continued to appreciate against the USD last week. It closed at 6.7716 against last Friday’s close at 6.7921 and the peg rate of 6.8275 on 6/20. The CNY was not in the spot light last week and if the CNY continues its gradual appreciation (virtually certain if the EUR continues to strengthen), then expect financial reform, lack of employment gains and the Gulf oil spill keeping Congress occupied and the currency manipulation legislation not in the forefront of issues for the time being.

Regional Markets

Dubai developer Nakheel said it has started making cash payments to trade creditors, in the second phase of a repayment schedule, and is restarting several projects put on hold during the downturn. The rest of the payments, in the form of a bond, would be made in coming months, the company said in a statement last Wednesday.

Forex

EUR:  

1. The dollar fell against the Euro on Friday, extending the previous day's steep losses on concerns over the U.S. economic recovery after disappointing U.S. jobs data.
2. U.S. private payrolls rose less than expected in June and overall employment fell for the first time this year as thousands of temporary census jobs ended.
3. The Euro rallied sharply against the dollar last week as investors looked past economic problems in the euro zone and instead focused on the possibility of a stalled economic recovery in the United States.
4. Furthermore, the euro had already gained momentum as concerns eased about euro-zone liquidity problems after a lower take-up of European Central Bank funding and successful Spanish bond auctions on Thursday.

GBP:  

1. Sterling hit a two-week high against the dollar on Friday after weak U.S. employment data prompted investors to dump the U.S. currency.
2. The pound has been increasing steadily after the new UK coalition government's drastic budget announced last month has raised optimism the Britain will be able to cut its budget deficit.
3. Sterling, however, struggled against the euro mainly due to covering of short positions created when the euro fell to 80.67 pence earlier last week. Traders said demand from a UK clearing house also helped boost the euro.

JPY:  

1. The dollar fell for a fourth straight week against the yen, losing an additional 1.7% and bringing the total loss over the four weeks to 4.4%.
2. The dollar was last at 87.80 yen, up 0.2%, after hitting a seven month low of 86.95 on Thursday. Japanese exporters' offers were likely to emerge in the low 88-yen range. Option triggers were seen below 85 yen.

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 (05-Jul-2010/09-Jul-2010)