Currency Update – Tuesday 14th October
It looks like a corner may have finally been turned, after record drops in stock markets last week, we’ve now had some record rises: Hang Seng rose 10.2%, the FTSE rose 8.3%, DAX 11.4%, and the S&P500 climbed 11.6%. The Dow Jones recorded it’s largest ever one day rise, climbing 936 points. It has taken a part nationalisation of the banking industry in the UK, with plans for the same in the US, plus a widespread government guarantee for inter-bank lending, for the sentiment to shift. As UK taxpayers, we now own £20bn of RBS, £11.5bn of HBoS, and £5.5bn in Lloyds TSB. The UK economy has gone from being seen as one of the most at risk, with it’s strong reliance on it’s financial sector, to being seen as comparatively safe as the one counterparty you can rely on not to default is national governments, unless they are Iceland.
As Sterling fell drastically on the back of last weeks slide it seems only fair that it should rally along with the stock markets; it has climbed almost 7c since last Friday to sit under 1.75, and has rallied back to around 1.28 against the Euro. This is in spite of yet more bad news from the retail high street with the BRC monitor showing a further fall of 1.5% in like for like sales, and the RICS house price survey showing the housing market practically stalling. One of the stipulations the Government will be placing on the banks it now partly owns will be to start lending again, however there is no chance of returning to the excessive liquidity of previous years, so it will still take some time for the Mortgage market to pick back up.
The bounce back in global confidence has also had the expected effect on the commodity market with copper climbing 6.75%, Nickel up 5%, and crude oil jumping 5.25%. While the Australian Government may have cut rates recently, so did a lot of other developed economies, so the AUD has kept it’s yield advantage, meaning that as risk appetite tentatively returns, the Australian Dollar has benefited. The AUD has risen 10% against the USD, and 4.1% against the Yen. The Pound has slipped against the Aussie Dollar, but still sits above 2.47.
Today is inflation day for the UK, and with the markets rallying some traders may even pay some attention to the economic data. The rate is expected to rise, possibly as high as 5.1%, but this is seen as the peak, with inflation expected to fall sharply from here. As the central bank looks likely to cut rates irrespective of where the inflation rate sits, the data may still not be as important as it was just a month ago, however clear signs that we have reached a peak could see interest rate significantly lower by Christmas.
Michael Corcoran | Treasury Solutions | nabCapital