Currency Update – Monday
The tone for the Pound last week was set by the Chancellor at the start, whose comments that the UK was facing the worst risks in 60 years sent Sterling lower, and when followed by news of falling mortgage approvals, Sterling managed to fall faster than a boxer with a glass jaw, to a record low against the Euro, and a two year low against the Dollar. The Dollar itself continued it’s rise as expectations for global growth were reduced, and by contrast the sentiment on the US economy was quite bullish. Falling German Industrial data helped the Dollar climb against the Euro pushing the rate down. The antipodean currencies also suffered last week as tumbling commodity prices, plus weakening domestic economies, pushed the NZD to a one year low, and the AUD, which also had a rate cut, fell over 5c from it’s weekly peak.
The Dollar didn’t have it all it’s own way last week with Friday’s non-farm payrolls falling by more than expected, a 84,000 fall compared to 75,000 expected, and the unemployment rate up to 6.1% from 5.7%. The bad news didn’t hurt the Dollar for long however as the weekend’s news of the huge bail out of the two US mortgage companies, Fannie May and Freddie Mac, has given the Dollar a boost, allowing it to push the Euro back under 1.4350. Quite why news that the US financial system was ‘two weeks from meltdown’ was taken as positive news, but I suppose the further signs that although America may like to pose itself as the most free economy in the world, the government are certainly not afraid to dip into the markets to ensure stability. The scale of the underwriting is hard to fully grasp, the US government is providing potentially $200bn in new capital plus new credit lines, and is stepping in where the market has failed in offering to buy mortgage backed securities from the troubled lenders.
The news has given stocks a boost globally, and as well as giving the Dollar some support, it has also helped the Pound, which has climbed back above 1.78 against the Dollar, and recovered from it’s record lows against the Euro to struggle back above 1.24.
The Pound has already fallen back against the Dollar this morning, but the first release, and pretty much the only release, of the day may give the Pound some support. We have the Producer Price Index which will give some insight into how fast costs are rising for business; the expectations are for the annual rate to stay around 10.2%, but other surveys point to the risks being on the upside and any increase in the PPI, will eventually feed through to CPI, with retailers margins already squeezed, will hamper the view that rates are likely to be cut in November.
Michael Corcoran | Treasury Solutions | nabCapital