Currency Update – Friday 17th October

Currency Update – Friday 17th October

As the central bank and the government's actions seem to have propped up the financial sector, with no news of further banks falling by the wayside, trader's attention turns to the 'real' economy and it is not nice viewing. Before the recent wave of panic over the credit crunch, caused by the fall of Lehman Brothers, there was some cautious optimism over the prospects for the US economy, which helped the Dollar rise dramatically against the Pound, however the data coming out of the US at the moment is less promising. Although there was some good news with the CPI rate dropping below 5%, the industrial production figures posted it's biggest monthly slide since 1984, and the Philadelphia survey fell to an 18 year low. This week we've also had some very soft retail sales figures, and Fed Chairman Bernanke warning that the US is heading towards an extended period of difficulty, as if it isn't already mired in one.

Although no banks have fallen recently, some have announced their loss figures, Citigroup announcing $2.8bn loss, and Merrill Lynch, recently sold, reporting a $5.1bn loss;  with reports of slowing growth from China, and further European banks seeking emergency funding, it is no surprise that the stock markets are staying volatile. Monday and Tuesday saw record rises in the Stock markets and Wednesday saw a historically significant fall. Yesterday kept that pattern with the FTSE dropping 5.35%, the DAX falling 4.91%, the S&P500 falling 2.0%, although the Dow Jones did finish higher, and the Asian markets suffered a more mixed day.

The volatility in the stock markets has also made itself felt in the currency markets with Sterling falling from above 1.75, to below 1.72, and back around 1.73 in the past couple of days. In contrast the GBP/EUR rate has been relatively steady oscillating in a range between 1.2750 and 1.29. As usual when the risk appetite is up and down, the greatest volatility is seen in the highest and lowest yielding currencies. Sterling has traded within a range against the AUD of above  AUD2.61 to below AUD2.50 in just one 24 hour period, and the movement against the JPY has been similarly volatile trading above Y181, and down towards Y170 in just a 3 day period.

The data out in Europe is low key, in the US this afternoon we have housing starts and a consumer confidence survey, neither of which is likely to give the Dollar much support, however once again traders will be looking at the global picture and taking their cue off the stock markets.

One good thing to come out of the recent crisis is the rapid fall in the price of oil. A barrel of oil will set you back roughly $72, and for the first time in a while it is possible to buy petrol at under £1 per litre, admittedly it is just under £1 at 99.9p per litre at least it is moving the right way.

Michael Corcoran | Treasury Solutions | nabCapital

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