Foreign Currency Report 17 October 06

With a great majority of clients buying Euros or Cypriot Pounds, now would seem a pertinent time to secure your currency while the rates remain at nine month highs. The question you might ask oneself is do we hold out and wait for a higher rate or do we bite the bullet and take a level not seen in the last nine months. Economic news out of the UK has been fairly encouraging recently, as Rightmove house prices jumped 2.0% in the month of October, bringing the annual rate to a 22-month high of 11.5%. Rightmove reported that the increase was driven by a lack in supply but noted that first time buyers are being priced out of the market to a larger extent. The release highlights that the outlook for higher interest rates has not yet curbed demand, but that increasing prices could cap demand. Other data set to post this week includes CPI, wage growth, and Q3 GDP, and all are estimated to weaken, creating a bearish (negative) bias for the week. The release of the minutes from the October Bank of England MPC meeting could save the currency, however, if the central bankers are leaning towards a more hawkish opinion. Do we take the chance!

Europe's economic environment has continued to improve, with France and Germany both seeing better growth prospects this year. Growth in France probably will be 2.2% this year, up from an earlier estimate of 2.1%, the Bank of France said. The German government, meanwhile, is reported to be close to raising its annual forecast to 2.4% from 1.6%. One of the key factors lifting optimism has been lower oil prices, after they hit record highs earlier this year. The high crude prices boosted petrol and energy costs, acting like an extra tax on consumers and companies. With oil prices sliding, analysts said that spending may increase, helping drive European growth forward. France's central bank raised its forecast for growth in the third quarter to 0.5%, up from a previous estimate of 0.4%. Its estimate for full year growth of 2.2% compares with a government forecast of between 2% and 2.5% growth. "The outlook for activity remains favourable for the coming months," a Bank of France spokesperson said, adding that the automotive industry remained a problem area. According to the Reuters news agency, which quoted an unidentified government source, Germany is very close to lifting its growth forecasts.

German Economy Minister Michael Glos declined to confirm the figures given by Reuters, but said that the direction of change in the annual growth forecasts was correct. Should the forecast for German growth of 2.4% be proved correct, then it would be the country's quickest rate since 2000. Last week, the European Commission trimmed its growth estimates for the eurozone, which includes France and Germany and the other nations using the euro. According to the Commission, the eurozone's economy would still expand by about 2.5% in 2006, its best rate of expansion since 2000.

The US dollar rose to its highest level against the Euro since July, after a government report on Friday showed U.S. retail sales excluding gasoline increased last month. The US Dollar also strengthened on further speculation that the Federal Reserve won't need to lower borrowing costs in the next several months. Sales excluding autos, gasoline and building materials, which the government uses to calculate gross domestic product figures for consumer spending, rose 0.8 percent in September, the greatest increase since January. The US Consumer Price Index is also due out this week along with other key economic data. The US CPI, which is due out on Wednesday, is expected to edge higher in September from 2.8 per cent to 2.9 per cent. This number along with the Philadelphia Fed index due on Thursday will be an important influence on the Fed when it next meets on Oct. 24-25. The Fed Funds Rate has been held at 5.25 percent for the past two meetings but stronger recent data could change this scenario