Currency Update – Tuesday 27th January
After the doom and gloom caused by the rapid drop in banking stocks at the end of last week, an open letter by the head of Barclays bank which, although it admitted a large write off of possibly GBP8bn, expressed optimism that a record revenue generating year would allow them to absorb the loss. Barclays shares rose by a record breaking 73% from opening yesterday, although as it fell by more than 50% on Friday the share price is still weaker than the middle of last week. The resurgence of banking stocks has revived risk appetite that has helped the Pound, but had a greater effect on the Dollar which has given up much of it’s gains from last week as investors feel confident enough to move their funds from it’s extremely low yielding safe embrace. Sterling has managed to climb from a low of 1.3550 to touch 1.42 against the Dollar in just over 24 hours.
The Dollar fell in spite of some surprisingly positive economic news as existing home sales jumped by 6.5% month on month, although of course the numbers will be volatile with so little actual sales going on. There was some bad news though from the corporate sector with Caterpillar announcing 32% decline in 4th quarter profit and 20,000 job losses, with thousands of job cuts announced by other corporations Obama has said that ‘we cannot afford delays’ on passing the economic recovery package. Obama’s bail out plan may help boost the US economy, but until then the bad news from the business community is likely to continue. The news of job losses wasn’t just from America with 67,000 losses announced across the UK economy; of course all these jobs won’t actually be lost in the coming days or weeks, but they are likely to weigh on the labour figures for some time to come.
Sterling didn’t produce the same kind of gains against the Euro as it has against the Dollar, although it has climbed up to near 1.07, with the Euro also gaining support from the increase in global risk appetite. The Australian Dollar, as per usual, has closely tracked global optimism and commodity prices, which have risen recently with copper, a good measure of general sentiment, jumping 9.35%. The Aussie Dollar has risen against the USD climbing to near 0.67, and has forced the Pound down to 2.13. The AUD was also boosted by the relative strength of it’s banking sector, which has managed to avoid the worst effects that have hit the other multinational banks; as the other banks have weakened, or expired, the big four Australian banks have found themselves amongst the 20 biggest banks in the world, not bad for a country with a population of just 22 million.
We have one of the meagre data for the UK out today with the CBI distributive trades survey for January giving us some idea of the post Christmas high street health; as news trickles through of retailers collapsing, it is doubtful the survey will provide much good news. We get the first of many reports on the health of the Eurozone this week with the IFO business climate for Germany, after last week’s surprise rise in the ZEW survey there is some optimism regarding today’s report, however the risks are to the downside and the optimism may actually work against the Euro if the survey comes in weaker, which may allow Sterling to rally above 1.07.