Currency Update – Friday
The shaky confidence in the US financial system has continued to weigh on the Dollar, halting, for now, it’s recent advances. There was news that the large US bank Lehman Brothers had failed to off-load half of its share offer, and more uncertainty over the two major mortgage lenders (Freddie Mac and Fannie May) who have been struggling for a while. Analysts from some major US banks have continued to downgrade the expected earnings from other banks, and the confidence in the whole system is eroding.
Later in the US trading day, as further rumours of a government rescue of the two mortgage lenders gave some support to banking stocks, the S&P actually finished slightly up, although this failed to give any support to the Dollar, as it was hit by a $5 rise in the price of oil, caused by the ramping up of tensions between Russia and NATO. As Russia very slowly pulls out of Georgia, claims that the cease-fire agreement allows Russia to keep ‘peacekeepers’ in Georgia indefinitely, they have also stopped any cooperation with NATO, and with the US proposing missile sites in Poland, plus Milliband talking about formal moves to get Georgia into NATO, the tensions are not likely to ease any time soon. The rise in the price of oil has weighed on the Dollar allowing the Pound to climb above 1.8750, and the Euro to climb to a high of 1.49 against the Dollar.
The Pound and the Euro have stayed around the 1.26 mark as both areas had some surprising economic releases. The UK’s surprise rise in the July’s retail sales, surprised the markets, showing a 0.8% rise, although revisions to previous data hampered some of the good news. The Eurozone also had some good news, or at least better than expected news, from the first estimate of PMI manufacturing and services. The index for manufacturing actually rose slightly, although still at a level of contraction, and the service index fell less than expected. The data from the Eurozone and the UK actually had very little effect on the markets, as neither release is going to change the outlook for the respective economies, and it is the geopolitical tension which is tilting the FX markets.
The last few weeks have been great for Britain in the Olympic medal tables, but not so good for the British Pound, and as the Olympics draws to a close ‘team GB’ looks likely to keep near the top of the medal table, but Sterling could have a soft finish. We have a revision to 2Q GDP, the first estimate put growth at 0.2%, however this was based on forecasts for certain measures, and as these measures have since proven to be lower than forecast there is scope for a downward revision to 0.1%, or even flat over the quarter, although this is unlikely. If the growth is downgraded the Pound will suffer going into the bank holiday weekend.
Michael Corcoran |Treasury Solutions | nabCapital