Currency Update – Friday 19th December
As we approach Christmas, Sterling is not having a very Merry time. Not only as it again fallen to new lows against the Euro, dropping below 1.05 before rallying, it has also lost a lot of it’s strength against the Dollar, which it gained after the Fed’s surprise 75bp rate cut. The Pound has slipped to hover around 1.50 against the Dollar, and the US currency has also clawed back some of it’s recent losses against the Euro, although the single currency is still sitting above 1.42 against the Dollar. There has been no real catalyst for the Dollar rally, it seems to be more to do with profit taking, as traders close long positions before the Christmas break.
The Pounds further falls against the Euro did have a catalyst, not that it has needed one before, and Deputy bank Governor Bean provided it, by stating in an FT interview that UK rates could go close to zero, he also said that the banks may need a further injection of capital to help recapitalise. His comments have irked the Chancellor, as although the level of rates may be in the Deputy Governor’s remit, although speculating on how low they may go is a bit reckless, capital injection, funded by the tax payer, are the treasury’s business, and politically sensitive, particularly as the banks only recently received 3.7bn in taxpayers money only a few weeks ago.
As mentioned in this note a few days ago, US interest rates dipped below those of Japan, however last night the BoJ acted to cut rates from 0.3% to 0.1%, taking it back below the US rate. They hope that this may ameliorate the Yen’s strength, but they have also refused to rule out a more direct intervention, and said they were ‘keenly watching’ the currencies strength. OPEC have also acted, cutting their production quotas again, in an failed attempt to raise the price of oil. Oil has fallen to below $40/bbl as the global slump weakens prospective demand; the price has continued to fall in spite of OPEC’s previous production cuts, partly due to the fact that the stated cuts haven’t been implemented, and the latest announcement of cuts is not quite believed either. OPEC is not a cohesive group, and finds it hard to enforce it’s quotas amongst it’s own members. Oil producing countries, particularly Iran, and Russia have enjoyed the benefits of the rapid rise in the price of oil, and will now be suffering as the price collapses.
We end a busy data week for the UK with consumer confidence data, which was released overnight, and actually showed a surprise rise to the measure, although it still stays at very low levels. Sterling seems to have benefited against the Euro from the same position squaring that has hurt the Dollar, with the Pound climbing back up towards 1.07 on this morning’s trading. However the Pounds rally against the Euro is only slight, as mentioned before it has actually fallen against the Dollar, and it is likely to stay on the backfoot for the near future.