Currency Update – Monday 8th December

Currency Update – Monday 8th December

Last week gave us a clearer look into just how bad the slowdown/recession will be, and also how seriously the central banks are taking the problem. We had record drops in manufacturing and service sector surveys, for the UK, Germany reported a 6.1% drop in manufacturing orders, and in the US the non farm payrolls report showed not only a 522k drop in employment this month, but also revised larger falls for the previous two months, taking the unemployment rate to 6.7%, a 15 year high. Central banks have taken notice of the economic climate; the MPC dropped their rates to 2%, and the ECB dropped theirs by 75bp, with the Riksbank trumping both with a 175bp cut.

Stock markets initially dropped after the US employment report, however as market's hopes of an auto industry bail out were raised by President elect Obama's statement that a collapse of the industry would be unacceptable, stock markets rallied and finished up on the day.  Sterling had a hard week falling 4.6% to record lows against the Euro, and a similar amount against the Dollar, towards $1.46, as risk appetite, hurt by the economic data, led to a sell off of Sterling. However it seems Obama's words may have sparked some optimism, or the market may have decided the Pound was oversold, but over the weekend Sterling has rallied climbing up towards 1.50 against the Dollar, and 1.16 against the Euro.

The economic data today is not kind to the Pound, as British Producer Prices show output prices falling by 0.7%, and input prices fell by 3.3%, helped by the drop in oil and commodities. The figures reinforce the BoE's view that CPI is likely to fall heavily, and will give the MPC space to cut rates next year to their lowest level in history. The Pound has slipped slightly on the back of the release but is staying relatively buoyant.

Later today we get German Industrial production figures, which after last Friday's dramatic drop in manufacturing orders is unlikely to offer the Euro any help. Gordon Brown is holding a summit of certain European leaders to discuss the European economic stimulus package, but the German chancellor, who is against using government money to stimulate the economy, has not been invited. The German government are seeing this as something of a snub, and Germany do pay more than their fair share into the European pot, however without the extra stimulus Germany may now suffer a more prolonged dip than the UK.

Michael Corcoran | Treasury Solutions | nabCapital

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