Currency Update – Thursday 13th November

Currency Update – Thursday 13th November

Sterling has fallen dramatically (again) late yesterday, as the BoE's inflation report proved to be especially bearish, and a global slump in equities caused the usual flight to perceived safe havens, leading the Dollar and the Yen to benefit. The inflation report revised down the BoE's expectations for growth, with GDP expected to fall 2% the middle of next year before recovering slightly; the expectations for inflation were also softer than many expected with the BoE painting real risks of CPI falling below their 1% target. The press conference, held after the report, also didn't give Sterling much support with Mervyn King saying that the MPC 'are prepared to cut bank rates to whatever level is necessary'. The markets are now pricing in UK rates falling to 1.5%, but it was the bearish view on the economy which prevailed, sending the FTSE down 1.5%, and the DAX down almost 3%.

As the American stock markets followed Europe and also fell, the S&P500 dropped 2% in one hour, the Pound suffered, falling below $1.49 against the USD Dollar, to a new six year low, and to a record low against the Euro, at one point dropping below €1.19. The Dollar and the Yen were the big beneficiaries, with the Dollar also pushing the Euro down below 1.24, and the Yen pushing the Pound down to around Y140, before the rate bounced back. The Australian Dollar was also suffering falling over 3c against the USD, although staying around 2.30 against the Pound, with reports that the Australian Central bank was buying AUD to help support the currency.

After the Republicans have attempted to nationalise the US financial industry, now the incoming Democrats are talking about investing in the auto industry, although Hank Paulson has moved quickly to state that the money ringfenced for the financial industry was intended just for them, and extra funds would have to be raised to bail out the auto industry. The money spent on the auto industry doesn't come without any strings and will be attached to conditions that the industry moves to making less fuel hungry cars, but with studies suggesting that 1 in 10 jobs in the US are based around the auto industry, the American's really do love their cars, then it is no surprise that the government are planning to intervene.  
It's a quiet day for economic releases, although we have already had news that the Germany is the first of the major European economies to enter a technical recession with two quarters of negative growth, however this news hasn't given the Pound any support against the Euro as the UK economy has to digest the news from BT that it is looking to shed 10,000 staff this financial year. The only other data out today of note is the US trade balance which is expected to narrow slightly. The Pound is expected to stay on the backfoot throughout the day as the bearish and dovish report form the BoE will still play on the minds of the markets. Just how far the Pound can fall is hard to predict; as the news from Germany today confirms, the UK economy isn't the only one suffering, although the Pound has suffered more than most currencies, so against the Euro it may not have too much further to fall; however the US economy was first into this dip, and is likely to be the first out of it, so the GBPUSD rate could fall further with some predicting a fall to around 1.40.

Michael Corcoran |Treasury Solutions | nabCapital

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