Currency Update – Friday 10th October

Well the markets have had a few days to mull over the central banks’ coordinated rate cut and they seem thoroughly unimpressed. The ripples from the credit crunch have turned into a tsunami starting from the US and sweeping around the globe along with trading hours in the stock exchanges. The drop started, or accelerated, in the US with the Dow Jones dropping 679 points, and the S&P500 down 7.62%; the slide continued into Asia overnight with a huge fall across a broad sweep of exchanges, led by Japan falling 11.4%, suffering due to the collapse of a leading insurer, and India dropping 9.6%. As London trading opened it has fallen 10%, with the European exchanges also suffering heavily. It is of course a coincidence that the spectacular falls happen on the same day as the lifting on the ban of short selling. The expectations of a global recession have impacted also on commodities with Oil continuing to fall, in spite of the high chances that OPEC will announce a cut in production next week, hitting $82 per barrel down $100 from just two weeks ago. Industrial metal prices are also falling, although Gold is taking up it’s historical role as a safe haven rising up $10 per ounce to $925.

The waves of volatility have lapped onto the currency markets sending Sterling lower. The Pound has been hit hard, dropping drastically against the Dollar, hitting below 1.69 on trading overnight. Sterling has also suffered against the Euro dropping down to around 1.24, as once again the reliance of the UK economy on the financial sector proves to be a weakness. The Yen has benefited, much like Gold, on it’s prospects as a safe haven. The panic has forced the GBP/JPY rate down to around JPY168, and as usual weakened the diametrically opposed AUD, which currently sits around 2.56 against the Pound, up from 2.05 only 3 months ago.

If the UK is suffering due to it’s reliance on it’s financial industry, then Iceland is being strangled by it. With the debt owed by the Icelandic banks dwarfing the GDP of the whole country, all 600,000 of them, Iceland is actually incapable of proposing a bail out like the US and the UK have tried to do, although they’ve had little success so far. There are talks about loans from Russia, and the IMF are poised to help out, but there can be no doubt that Iceland is in trouble, and as usual in today’s interconnected world, the UK is involved, with local councils as well as charities amongst others, investing £1bn in the Icelandic system. With private deposits likely to add up to more than £20bn, the UK government have threatened to step in to seize Icelandic assets, and have indeed also done so with one failing bank. If the councils fail to claw back their deposits then we can all expect to pay a bit more council tax in the future, which is just what people need to hear in the middle of the credit crunch.

There isn’t any data today that would divert the markets attention away from the global meltdown, I can’t imagine what data could. There are rumours that the US government is planning to raise the stakes once again, after announcing a $700bn rescue plan, they are now, thinking of guaranteeing all deposits with US banks, quite where all this money is going to come from is yet to be explained. The other large event is the meeting of the finance ministers of the G7 countries. This meeting was the usual scheduled meeting but more will be expected from it than the usual anaemic statement.

Hazel Wilkinson| Treasury Solutions | nabCapital