Currency Update – Wednesday 12th November

Currency Update – Wednesday 12th November

The brief fillip given to the markets by the Chinese spending plans has petered out and once again the equity markets turn bearish with the FTSE dropping 3.6% yesterday, while the S&P500 fell 2.2%. As is the case recently bad economic news has given the Dollar a boost, as investors are prompted to unwind their trading strategies and repatriate their funds back into Dollars, which once again seen as a safe haven currency. The Dollar has pushed the Sterling down to 1.5350, and the Euro has slipped back below 1.26 against the Euro.

Yesterday's German Zew index actually showed some signs of consolidation, however the numbers still remained in negative territory and optimism remained weak in spite of  the ECB's rate cutting exercise. The survey may have been one factor in sending the Pound down to a new record low against the Euro, although as the Pound also hit a 12 year low against a basket of currencies, it wasn't the only factor. With the UK economy suffering the main political parties have started falling over themselves to cut taxes, of course only the labour party are actually able to do so, at least for a couple of years, as they are the party in power; with the public debt already high, the government committed to spending on the financial sector, and rising unemployment, it is hard to see where the funding for these cuts will come from, and anyway any such cuts will take some time to feed through to the economy.

The Russian Rouble is the latest victim, from outside the major currencies, of the meltdown, as the flight from risk has caused their stock markets to tumble 12.6%,  and the price of oil has caused problems in the economy. The Rouble had been supported by the Russian government which has the third largest reserves in the world, however the strain of keeping the Rouble high has finally cracked the central bank, which has increased the daily trading range of the Rouble, and the currency duly fell. The credit crunch hit the Anglo-Saxon economies first, but as the international system has come under strain, the fall in commodities, and the flight from risk has spread the problem out to pretty much every economy in the world.
There are tow major figures out today for the UK, the just released unemployment figures, and the BoE's quarterly inflation report. The unemployment report shows the jobless numbers have increased to the highest level since 1997, at 1.825 million (this doesn't include the 2.6 million on incapacity benefit), and has pushed up the unemployment rate to 5.8%. The figures were already expected to be weak so Sterling has not reacted to the release.
At 10:30am we get the inflation report and this is likely to have some effect on the currency. The BoE is likely to have drastically cut it's growth prediction, and is likely to forecast a 1% drop in GDP next year, previously they expected a 0.5% rise. The prediction for inflation is likely to forecast CPI around 2%, but will talk about large downside risks to their forecast, paving the way for further rate cuts early next year. The Pound may well be under pressure after the release of the report, and traders will be listening to Mervyn King in the press conference trying to second guess the BoE's actions in the coming months.

Michael Corcoran |Treasury Solutions | nabCapital

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