Currency Update – Friday 27th March
The multiple and extensive measures taken by the US government to try to support their economy, the first being Bush’s tax rebate and latest being Obama’s toxic asset bank plan, seem to have had the desired effect, with some renewal of risk appetite and optimism finally sticking to the markets. There has been some better economic news out of the US, and the financial sector has recovered continuing the perception that another banking collapse is more remote. The rise in market sentiment has had the expected effect on commodity prices with rises in copper, often seen as a guide to industrial prices in general, and crude oil rising above $50 per barrel, this has had the usual effect on the high yielding currencies, if any could be considered high yielding now, and the NZD has risen to a 10 week high forcing the Pound down to neat 2.50, while the AUD has also appreciated taking the Pound down to 2.05.
The antipodean currencies aren’t the only ones that have rallied in the last few days, the Dollar has also benefitted from the renewed economic strength, and the Pound has fallen back from it’s peak above 1.47, to sit just above 1.44. The Euro has also dipped back from it’s peak against the Dollar, after almost hitting 1.38, it has fallen down to near 1.35, although this still represents a big jump up from the start of March when the Euro was under 1.26 against the Dollar.
The Pound itself hasn’t benefitted from any renewed optimism, interest rates have been slashed to just 0.5%, and QE measures have made the worlds traders worried over the state of the national borrowing, plus the prospects of long term inflation. The UK has also had some more weak economic data, the latest being a surprise drop in the retail sales, which did expect a fall of 0.4%, but got a 1.9% drop, mostly blamed on the heavy snows at the start of February. This has erased the gains Sterling had made against the Euro, taking it back to the range between 1.06 and 1.07. We get the ECB meeting next week, and there have been some noises that QE measures could be considered, if there is an announcement of such measures, or if they even show themselves open to such measure in the future, the Pound may finally recover against the single currency.
To end the week we have the last estimate of UK GDP for 4Q 2008, expected to stay steady and therefore not effect the markets. We also have US personal income/spending figures, expected to show a fall, and the PCE deflator measure of inflation, which is likely to show that although deflation remains a risk, it is not an immediate one. The Pound has continued to slip against the Dollar this morning, falling to just above 1.43, but it will be next Thursday ECB meeting which provides the next big market events, and could start the process of Euro weakening by the central bank, something that has already been done by the UK, US, Japan and Switzerland.