Currency Update – Tuesday

Currency Update – Tuesday

It was almost exactly a year ago today that I came back from holiday to find that the credit crunch had hit whilst I was away and the markets had a very different look from when I left. At the time it was unclear just how far reaching the effects of the crisis would be. Coming back from holiday this year, the markets have, thankfully, not been through the same disruptions as last year, but the credit crisis still rumbles on and one of it's main victims, at least in the financial sector, announced losses that are worst than feared; Northern Rock may already have been nationalised, but a £585m loss represents more misery for the troubled lender. Over the year the financial sector has been hit hard elsewhere with many banks writing down assets and announcing lower profits; HSBC just announcing a 28% fall.

The credit crunch may not be responsible for the global downturn since last year, but it certainly hasn't helped. Since July last year the US has seen a dramatic economic slowdown, and even more dramatic action from the Federal Bank who have slashed rates at a fast pace, even announcing out of schedule emergency rate cuts in the face of sliding markets. The US Fed are announcing another rate decision after UK trading hours today, which is expected to keep rates on hold. After a better than expected non-farm payrolls last week, higher than expected inflation data, and a steady manufacturing report, with an actual increase in factory orders, the Dollar has started the week on the front foot, pushing Sterling down to below 1.96 against the Dollar and the Euro down towards 1.55. The Fed will release a statement alongside their no change decision, and this has the capability to move the markets, particularly if the Fed stress the risks to inflation, fuelling speculation of a rate rise in the near future.

Compared to the US and the UK, the EU has managed to dodge the worst effects of the credit crisis, but it has failed to escape the effects of high fuel and food prices.The Eurozone economy may only just now be showing signs of weakness, but it has been battling inflation along with the rest of the developed world, and this saw them raise rates last month, a tactic unlikely to be repeated on Thursday with a creaking economy expected to keep the ECB on hold waiting for inflation to moderate. The UK have a similar problem, but with an even weaker economy there is no scope to put rates up to fight inflation. the MPC announce their rate decision shortly before the ECB and there are also expected to keep rates on hold. The Pound has weakened slightly against the Euro, not helped by softer than expected manufacturing figures released yesterday, slipping back below 1.26, before recovering slightly.

We've already had the first of what is likely to be a week full of rate decisions, and first up to the plate was Australia. They have kept their rates on hold but the next move is expected to be downwards, with a softening economy weighing on growth. With all the rate decision out later this week, the markets are likely to take a cautious approach to any intermediate data releases, but we do have a few for the UK today. We have PMI services data for July, and Manufacturing output for June, both of which are expected to show further weakness in the economy pointing the way for the downtrend in the UK economy to continue into the 3rd Quarter.

Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital

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