Currency Update – Friday 3rd April 2009
Well the G20 delivered pretty much what everyone was expecting, allowing all the head of states to go home and claim victory, and also allowing many photo opportunities with President Obama, allowing them to bask in his reflected glory. The ECB however proved their conservative credentials once again, by confounding the market view of a 50bp cut, by only cutting 0.25%, and delaying even thinking about QE until the next meeting in May. The decision was apparently reached by consensus, which would indicate that it wasn’t unanimous and this is probably why, when pressed, Trichet admitted that the rate cutting exercise probably wasn’t over. In a defensive performance Trichet also reminded the assembled press that the ECB had cut by 3% since last October, which may be drastic in historical terms, but we are in special times, and other central banks have taken a much more activist role. It is hard to fathom why the ECB are so reluctant to take action with inflation already so low and likely to fall further, Trichet does say that falling commodity prices are increasing household income, but this is unlikely to be enough to drag the Eurozone out of recession, or to fight of the prospect of deflation. The Euro did get a boost from the decision, but with further rate cut’s expected in coming months, and QE still likely to be discussed, the Pound only fell back to around 1.09, and has even managed to eke back some gains above that currently sitting just below 1.0950.
After all the grandstanding and political childishness (the French always like to be last to arrive at these events, especially if the USA are there, even though this privilege is normally given to the longest standing head of state, which in this case would have been Brazil), the G20 did manage to agree on some things: more funding for the IMF, more money to help fund trade finance, a pledge to ‘refrain from competitive devaluation of our currencies (likely to be ignored), steps to tighten the global regulatory framework and clamp down on tax havens, the last point allowing Sarkozy to keep his seat till the end of the conference, or maybe he realised that Obama is more popular in France than he is. So everything in the G20 communique was pretty much already agreed before the meeting took place, and none of it is going to save jobs in the immediate term, but it hopefully will ease the path to recovery, once the global economy does start to recover.
There have been some signs of recovery, stock markets have continued to rise, the FTSE was up by 4.3%, and China’s PMI for manufacturing actually rose into expansion territory for the first time, while in more dubious news the US regulator has relaxed some rules on mark to market accounting, allowing companies more leeway in valuing their assets. This has given the Pound quite a boost against the Dollar, it climbed up to just under 1.48 yesterday, before dropping back and then rising again this morning.
The Pounds rise this morning has also been due to yet more good news from the UK economy, or at least less bad news, as the PMI for the service sector has come in at the highest rate since last August, whilst still showing signs of contraction, it is least showing a slower pace of contraction.
The big release of the day will of course be the US non farm payrolls, judging from Wednesday’s soft ADP report, we could yet another large negative figure, with some estimates as high as 750k, and back revisions to data unlikely to offer much hope. Although the Dollar has lost some of it’s safe haven status due to the governments huge spending, a weak report may still strengthen the Dollar, as it removes some of the optimism from the markets.