Currency Update – Tuesday 9th Sept

America likes to paint itself as a strong believer in the market economy, although the presidential candidates opposition to NAFTA seems to contradict this, and the government’s recent intervention also seems to weaken America’s ideological stance, it certainly disregards the moral hazard that many in Europe have sought to avoid in bailing out those who have taken unacceptable risks. The US government were pretty much forced to intervene in the two mortgage lenders, as they were with Bear Sterns, and the UK government was with Northern Rock, so when they paint it as drawing a line under the housing crisis, as they did with Bear Sterns, then not everyone is convinced, but enough are to allow the intervention to give the Dollar a boost.

Sterling’s strong opening of the week was swiftly reversed especially against the Dollar as the Fed’s actions boosted the US currency, overnight GBPUSD hit a low below 1.75, before recovering today. The Dollar has also climbed against the Euro pushing the rate down below 1.4150 on this morning’s trading.

The Euro has also fallen against the Pound, allowing the rate to climb above 1.24; this is surprising as the economic data out yesterday, and overnight, is not supportive of Sterling. Yesterday’s PPI figures, showed the both input and output prices falling as lower commodity prices have finally started to feed through. Output prices actually fell at the sharpest rate since records began in 1986, and although the annual rate is still a 9.7% rise, the signs of prices falling will be welcomed by the BoE as it should give them more chance to cut rates, possibly this year. Overnight the RICS house price survey, which showed completed sales at it’s lowest level since the survey was launched in 1978, and the BRC retail index showed retail sales falling by 1% in August, not helped by the gloomy weather, indicated why many are anxious for inflation to moderate and allow rates to be cut. Both figures would normally be expected to weaken Sterling but as the sentiment on the UK is already bearish, neither has made much impact.

This morning in the UK we have Industrial production figures which is expected to show a small contraction, although many traders hope for a bounce after last months 0.5% fall, and others in the LSE just hope that their computers actually work today. The Industrial production figures are a crucial factor in whether the UK GDP will slip in contraction in the last half of 2008.

Michael Corcoran | Treasury Solutions | nabCapital