Currency Update – Friday 31st October

The markets retained their volatility yesterday as we are still in the middle of a round of interest rate cuts; we’ve had cuts from the US, China, Hong Kong, Taiwan, and overnight from the Bank of Japan. The Japanese rate cut is from 0.5%, to 0.3%, making it the lowest interest rate in the developed world. We also have expected rate cuts next week from the ECB, the BoE and the RBA, so the markets are likely to remain unstable as traders try to predict what the cuts, and the sentiment of the central banks, will be. The Japanese rate cut has helped boost the equity markets, which were already on an upward trend with the Nikkei rising almost 10%, the Hang Seng up 12.8%, and the S&P500 has risen by 12.4% since Monday.  

The effects on the currency markets have been less clear, The Dollar had been slipping back over the previous days as financial sentiment recovered, but it has started to climb again, as US GDP figures showed a lower fall than expected in growth, 0.3% compared to 0.5%, although consumer spending also showed the first fall since 1991.  This has dropped the GBPUSD rate which had hit a high above 1.66 yesterday morning, down to around 1.62; the Dollar has made similar gains against the Euro, as the EURUSD rate fell from above 1.32, to sit around 1.27. The Pound has also gained against the Euro to just under 1.28, as the month end economic survey’s showed an acceleration in the Eurozone slowdown. The Business climate indicator fell to it’s lowest level since June 1996, and the consumer sentiment fell to a level last seen in 1994, when the global economy was recovering from a recession.

The data for the UK today has already been released and it is not good reading, with consumer confidence figures showing a headline fall. It seems consumers have been reigning in their spending with John Lewis partnership also reporting falling sales. In the run up to Christmas (I know there is still 2 months to go but the advertising industry have been hard selling Christmas for weeks now), the decline in consumer spending and sentiment is worrying.

In the US this afternoon we get some regional economic surveys, expected to fall, as well as some details on personal income and spending. In the current market climate the economic surveys are not as important as whatever action the central banks take, so the market will be watching and waiting for next weeks interest rate moves.

Michael Corcoran | Treasury Solutions | nabCapital