Currency Update – Monday 3rd November
The Pound has stayed steady over the weekend, which is in no part due to the economic situation, with every economic indicator showing all the major developed economies suffering; the markets have instead reacted to the recent actions of the central banks who have across the board embarked on a huge rate cutting exercise. After last months coordinated cut, the banks have followed up on their actions, and confirmed their intentions with continued rate cuts. We have had cuts from: the US, China, India, Hong Kong, Taiwan, South Korea, and even Japan. This week the markets expect rate cuts from first of all the Reserve Bank of Australia, who meet in Tuesday, and then from the ECB and the BoE; all three banks are expected to cut by 50bp, but the speculation is that the BoE may actually cut by more, with some of the papers at the weekend talking about a 100bp cut.
The expectation of central bank action has kept the Pound up above 1.62 against the US Dollar, and up around 1.2650 against the Euro. The Yen has continued to give up it’s gains from the previous few week’s strong rally, slipping back to around JPY161 against the Pound, when it was at down below JPY140. On the flip side to the Yen movements the Pound has given up some of it’s gains against the Aussie Dollar, after climbing above 2.70, albeit briefly, the GBPAUD rate is now down below 2.40.
The Pounds slide over the month of October, isn’t all bad news for the UK economy; it does of course mean that imports are more expensive, which is likely to hurt the retail sector and keep some inflationary pressures, but it also takes some of the price pressures off what is left of our manufacturing industry, and greatly benefits not just exporting companies, whose goods enjoyed a rapid discounting, but also many of the larger corporations who report their profits in Dollars.
We have a lot of big events this week, starting tomorrow with the US election; It’s hard to know exactly what effects, if any, the immediate aftermath of the election will have on the markets, but the economy has gradually come to dominate the campaign agenda, and if comrade Obama does win, with large majorities in the Senate and the House of Representatives, then we could get details of a 2nd financial stimulus package to be enacted before the new year.
We have, on Thursday, the rate decisions from the ECB and the MPC, with both expected to cut drastically it will be the statements and the views expressed, which of course will be examined for indications as to the genuine appetite each bank has for yet more cuts.
Michael Corcoran | Treasury Solutions | nabCapital