Currency Update – Thursday 6th November

As America gets its first black President (whom 12% of Americans think is Muslim), elected on a message of optimism and hope, the markets have failed to follow the electorates lead. Of course it didn’t help that there was some timely reminders of the task facing the new president with the ADP employment report plunging by more than expected, which doesn’t bode well for tomorrow’s non-farm payrolls, while a services survey showed activity falling to its lowest level since the survey began. As the bad news, and the doubts that any president can do much about it, filtered through the markets US equities fell, with the S&P500 falling by 5.3%.

The Dollar did respond to the optimism in the US, at least against the Pound, with the rate falling back down below 1.60. Of course this could also have been due to the even more depressing news coming out of the UK economy, which has to face a fall in manufacturing output, with the annual rate now dropping by 2.3%, and a drop in a services survey for the sixth month in a row. Unsurprisingly the FTSE fell by 2.3%, and European Bourses also dropped. Although this did hurt the Pound, with the rate falling against the Euro, dropping down below 1.23 overnight, and currently sitting below 1.24. The Euro seems to have benefited from the bad news in the US and the UK, as it also climbed against the Dollar up towards 1.30.                                               

Today is of course rate decision day. We get decisions from both the ECB and the MPC. The UK steps up to the plate first and the MPC are expected by the media to cut by 50bp, the markets are pricing in a cut of 75bp, and some economists and business leaders are calling for a 100bp cut. If the MPC want to surprise the markets they will have to cut by 100bp, which in normal market conditions would weaken the Pound, however these aren’t normal market conditions, which is why a 100bp cut is on the cards, therefore the Pound may weaken initially, but the increased confidence, or decreased pessimism, a cut should engender may help the Pound over the coming weeks.

Shortly after the MPC’s decision, the ECB will announce a 50bp cut. The ECB like to do things steadily, so the chances for a surprise are slim. However as per normal the post decision press conference will be studied closely to see just how far and how soon rates will be cut.

Michael Corcoran | Treasury Solutions | nabCapital