Currency Update – Thursday 23rd October

Currency Update – Thursday 23rd October

Sterling has failed to recover from this weeks dramatic drop as Gordon Brown echoed Mervyn King's outlook, predicting a recession, although being a politician he painted it has a global recession, from which Britain would not be able to insulate itself. Brown would have to take this line as previously he has emphasised that the UK is 'uniquely placed' to withstand a global slowdown, when in fact it is uniquely badly placed with a large trade deficit, and an over-reliance on it's financial sector. It is the structure of the UK economy which has placed the Pound in such a weak position, and yesterday's MPC minutes failed to offer any direction for the currency. The vote was unanimous for the rate cut, and even though there was little in the minutes, the downturn in the economy has created an expectation for a further 50bp cut at the next meeting.

With Brown's comments coming hot on the heels of King's, it is no surprise that the Pound has stayed low, around 1.63 against the Dollar, and around 1.27 against the Euro. The de-leveraging from investment firms continues strengthening the US Dollar which has risen almost 6% on an index basis since the 14th of October.

The signs of the credit crunch spreading away from the European and American economies continues with New Zealand cutting their rates by 100bp, which paradoxically actually strengthened the Kiwi Dollar as many expected an even greater rate cut. In contrast to every other economy Hungary actually raised their rates by 3%, in an attempt to shore up their currency which had dropped 10% in a week, and Argentina's stock market ended down 17% lower after the private pension scheme was nationalised. The problems have led to further falls in global stock markets with Asian markets falling between 5-7%, European and Americans equities fell 4-5%.                                                 

The UK takes centre stage again today with Retail sales and Mortgage approvals. Retail sales are predictably down, by 0.4%, but such is the gloom on the UK markets that this was actually better than expected. Mortgage approvals are expected to also be at a low level with the credit crunch stopping many banks lending. In a week of pessimism for the UK economy and the Pound, tomorrow is unlikely to provide any lift, with the GDP figures expected to be the first growth figures to confirm the UK's slide into recession.

Michael Corcoran| Treasury Solutions | nabCapital

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