Currency Update – Tuesday 7th April

Sterling struggled to build on it’s weekend gains, and even fell back against the Dollar, as stock markets recorded a small fall, with the S&P500 recording it’s first drop in a week. Financial stocks led the markets down as comments from an analyst that the government actions would not help the banks as much as hoped, and bad debts would be more than the great depression, although of course the economy and the total amount of all loans is much bigger now than the 1930s. With the last few months of pessimism, any optimism was always going to be tentative and jittery, and so it has proved with some fearing that the recent rally is just a short term correction to the general bear market. As the Dollar fell with the stock rally, it has risen with the market nervousness forcing the Pound below 1.4750, and the Euro back down below 1.34.

The Pound didn’t fall back against the Euro, but it didn’t extend it’s gains either, not even with a more than expected Eurozone retail sales fall, down 4%yoy, and comments from ECB policymakers that the is still room to cut rates, something everyone can see, and that currency intervention may be warranted in some circumstances, which is pretty much the opposite of what the politicians said they would do at the latest G20 meeting. It is fairly widely accepted that the ECB still have space to go on the rate cuts, and that QE will probably be used in the future, the continuing weak economic data and falling inflation point to more action from the ECB, and the Euro weakening in the future. The Pound has stayed steady against the Euro, holding around 1.10.

We’ve got a MPC from the UK at the end of this short week, but we’ve already had a rate decision across the opposite side of the world, and with the expectation balanced between a 25bp and a 50bp cut, the eventual 25bp cut, to 3%, had the effect of strengthening the Aussie Dollar. The cut has taken rates down to their lowest level since 1960, and there are some signs that the cutting exercise could be done, although with rates still well above other developed economies then every piece of weak data in the coming months will raise calls for more cuts. The Australian economy can endure higher interest rates due to the health of their banking sector, which allows the banks to pass on the cuts that have been announced (there have been 6 cuts in the last 8 months), and lessens the need for the Australian banks to hoard capital. The Pound fell to below 2.06 against the Aussie Dollar, which in turn has climbed above 0.71 against the Dollar.

We get the first of the backward looking data today, with Industrial production data showing the biggest quarterly drop since 1974, at -6.5%, and over 13% since a year ago. It is a sign of how bad the pessimism over the last few months have been that this represented a smaller fall than expected, and has made little difference to the strength of the Pound.

This afternoon consumer credit and consumer confidence figures are out in the US, while the minutes of the FOMC meeting are also released. However as yesterday, the currency markets are likely to take their lead from equities and government announcements.