Currency Update

Currency Update

It had been 44 years since Spain won a tournament (42 for England), but they finally broke their barren spell last night with a comfortable victory, the equity markets are also on the verge of breaking their own record although heading for their worst performance in 26 years isn't something they will be pleased with. Worries over the US banking sector, coupled with the high price of oil, a barrel now costs over $140, has many investors concerned over the chances of a rally in the US economy, and with growth now close to 0%, any expectations of rate rises in the US are being squeezed out of the markets. The S&P 500 is near it's Bear Sterns low and has dropped 12.5%, while the FTSE 100 has fallen almost 15% in the first half of this year.

It would only take another small drop today to give Wall Street the worst June since the great depression. Currency investors have taken note and sold the Dollar heavily. The Pound has had it's own woes with UK GDP data, released Friday, actually revised downwards to 0.3% for the first quarter, but Sterling still managed to climb above 1.99 against the weakening US Dollar. The Euro also made some heavy gains climbing above 1.58, but stayed steady against the Pound around 1.26.

Usually when the markets are in turmoil and global stocks are plummeting the Yen gains and the antipodean currencies suffer, however this time the trend has not been kept. The Yen has been kept weak by real money flows out of the country as Japanese investment trusts seeking higher returns abroad.  The AUD gained almost 3% against the Yen to a seven month high, and could be supported further this week as more investment funds receive funds from the wage bonus season. While traders still price in a chance of a further Australian rate hike, although the chances are reducing, and Japanese investor's fell comfortable seeking returns in other countries the Australian Dollar is likely to be supported, particularly as commodity prices keep rising.

Sterling's rise against the Dollar is even more surprising considering the state of the data coming out from the UK economy. After Friday's downward revision to GDP, this morning saw consumer confidence figures fall to their lowest level in 18 years, with expectations falling to a 25 year low. We also have mortgage approval numbers out this morning, which if in line with other data will show a halving of mortgage approvals, from this time last year.

Later we have a flash estimate of Eurozone CPI which is likely to show why the ECB are likely to raise rates later this week. Thursday is a big day in the markets with the ECB and MPC decisions, plus the US non-farm payrolls brought forward to avoid the American Independence day.

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