Currency Update – Friday 5th December

So after last months shock, the MPC returned to form and delivered what the market expected, although it is hard to call the committee staid when they deliver a 1% cut to take the rate to it’s lowest level since the bank began, roughly 300 years. The last time rates were at this level was 1951, but it is likely that the current crisis will take rates even lower with many expecting a further 50bp cut early next year. Whether the recent drastic rate cuts will stimulate the economy is uncertain, the market’s initially reacted positively with Sterling rallying after the decision, although it had previously fallen before it, however it is not the cost of credit, but the availability that has characterised the credit crunch, and the recent cuts are not guaranteed to increase that, it is not even guaranteed to ease the cost, with the biggest home lender, only passing 0.25% of the cut onto their borrowers.

The BoE Wasn’t the only bank making rate changes yesterday, nor was it the only bank making record changes, the Riksbank cut their rates by a massive 175bp, while the ECB cut their rates by a record amount, down 75bp to 2.5%. The ECB decision was not an unanimous one, with Trichet describing it as a consensus decision, and revealing that a smaller rate cut was discussed. In the end with a drastic slowdown in the Eurozone economy, with the usual powerhouses such as Germany dipping into recession, it became clear that action needed to be taken, and with the bad economic news continuing to roll in then a further 50bp cut early next year seems likely.

As mentioned Sterling briefly rallied after the rate decision, but with other gloomy news on the UK economy, such as the HBOS house price measure showing a 15%yoy decrease, and new car sales down 37% on a year ago, have kept the Pound low against the Dollar at around 1.47, and hit yet another record low against the Euro, dropping down to 1.1467 overnight, before rallying to 1.15 this morning. The Euro itself got a boost by the ECB’s rate cut, allowing it to rise to almost 1.28 against the Dollar, and partly explaining the record low in GBPEUR.

The gloomy economic news has not only had an effect on the currency markets, but also on commodities with Oil now down below $45/bbl, a 4 year low, and today’s data is unlikely to give the oil producing countries any reason for optimism. As always on the first Friday of any month, the US non-farm payrolls will dominate, and the very weak ADP employment report out earlier this week points to a low figure. The expectations are for a 250k drop, but the figure could be much worse, although it should be remembered that the headlines figures are extremely unreliable and it is the revisions to previous figures which give the clearer picture.

Michael Corcoran | Treasury Solutions | nabCapital