Currency Update – Friday 12th December

Currency Update – Friday 12th December

It looks like it's not going to be a very jolly Christmas, at least not for anyone whose job depends upon the American Auto industry, and that is around 3 million Americans according to some estimates, or those whose business depends upon a strong Pound. The Senate rejected the $14bn Auto bail out bill, as a dispute of union wage cuts, to bring US wages in line with Japanese and make the industry more competitive, led just 10 republicans to back the bill, not enough to get it passed. Predictably the shares in the three big US car makers have tumbled, but the bad news does not end there with Bank of America also announcing 30,000 job cuts, 10% of their workforce, due to their merger with Merryl Lynch.

Unlike in previous months, when bad news, even from the US, has benefited the Dollar, these further hammer blows have actually weakened the Dollar, as it comes at the same time as a larger than expected trade deficit, meaning that the US will be seeking external funding for some time to come, as well as the government debt reaching extraordinary levels, due to the financial bail out fund which at $700bn, dwarfs what the car makers were asking for. The Euro has managed to climb back above 1.34 against the Dollar on the back of yesterday's news.

The bad news in the US has even allowed the Pound to climb against the Dollar; although only briefly above 1.51, before it has dropped back down to sit below 1.49. The Pound has had a hard week, possibly due to our own terrible trade balance figures, and large public debt. It has hit a new low against the Euro down just below 1.12, in spite of Woolworths trying it's best to boost the retail figures, and fight high street inflation with it's 50% closing down sale. Woolworths is a store a lot of people have affection for, mostly due to childhood memories of their pick and mix sweets, but as the major supermarkets have encroached onto their markets, the fact that Woolworths brings memories of childhood, points to it being behind the times in the current retail market.

Once again news from the UK economy is absent, and it will be US retail sales which are expected to show once again just how deep the recession is biting. Yesterday we had extremely bad weekly employment figures in the US, and it now looks like the sharp rise in the US Dollar may have run it's course. Traders are pricing in another 75bps of rate cutting down to 0.25% next week, and if the retail sales prove even more disastrous than the market expects, then even this may not be enough to save the Dollar from a reversal, of course whether the Pound is in any shape to take advantage of the Dollar's weakness is far from certain.

Michael Corcoran | Treasury Solutions | nabCapital

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