Currency Update

The UK and US return from their long weekends to find the market’s roughly where they left them on Friday. It was a memorial weekend over in the states, the symbolic start to the driving season, and with Oil hitting a record high above $135 per barrel, the price of gasoline isn’t likely to come down anytime soon. The fears of stagflation have hurt the sentitment on the Dollar, dragging down the US stock markets and weighing on the Dollar. Stagflation will remain the focus for the rest of the week, with consumer confidence, durable goods order, and PCE deflator figures out on Friday. With the high price of oil weighing on the USD, the currency could be on the backfoot for the rest of the week.

The Eurozone has weathered the credit crunch better then most so far, however the same concerns that are weighing on the US and the UK are starting to become also evident in the Eurozone. The purchase managers index released on Friday further showed the split in the Eurozone economies with Germany still posting strong growth, but elsewhere growth is stalling, as it is in Italy. The report also showed continuing inflationary pressures, which have led to expectations of a spike in CPI, currently at 3.3%, with some expecting a break through 4%.

With weakening economic growth and high inflation worrying the world’s leading ecconomies it is prehaps no suprise to see stock markets fall, with the Far East seeing widespread falls, the Nikkei fell 2.3%, the Hang Seng 2.4% and the Shanghai composite was down 3.1%. The reduction in optimism and risk appetitie hasn’t hurt the Aussie Dollar much, it still sits around 0.96 against the AUD and 2.0550 against Sterling, as it gains support from a rise in Industrial Metal prices, with Chinese rebuilding after the earthquake likely to put extra demand pressure on construction materials.

Stephen Howarth | Treasury Solutions | nabCapital | National Australia Bank