Currency Update – Wednesday 17th December
No one could ever accuse the US Fed for being a hands off central bank, as the economic crisis has slowly revealed itself to be much worse than almost everyone expected (don’t forget this all first started at the end of July 2007), the Fed have drastically cut their funding rate during the usual rate decision meetings, and even on occasion between meetings, as they reacted to head off collapsing stock markets. Last night the Fed shot the last bullet in their rate cutting armoury, cutting the rate by between 75 and 100bp; as the rate was already at 1%, this means that the US is at or near 0% interest rates. With nowhere else to go on interest rates, the Fed have also announced that they are willing to buy various securities to try to pump some money into the system.
The drastic cuts in the US funding rate has greatly weakened the Dollar, allowing the Pound to climb back upwards towards 1.56, the Euro up to 1.41, and the Yen down to below Y89 against the Dollar. US equities have rallied strongly on the back of the Fed’s decision (S&P500 up over 5%), and this rally travelled into the Asian markets overnight. It now looks like the Dollar’s strong advance may be spent, with 2009 proving to be a much more trying year for the Dollar, with it’s status as a low yielding currency, and the large government debt, plus trade deficit, likely to weigh on the dollar.
Sterling had it’s own important economic release yesterday in the form of the latest inflation figures, which have showed that CPI hasn’t fallen by as much as many expected, although it has fallen someway, down to 4.1%. One factor in inflation sticking at a higher level is the falling Pound, as Sterling has come down it has limited the effect of falling commodity and food prices, so the price of food has actually gone up last month, which had a big effect on inflation. The inflation figures have given the Pound no benefit as it still slips lower against the Euro, this morning it has moved down below 1.11, and could hit 1.10 or lower before the end of the week.
The data keeps rolling out for the UK, and today’s releases are the employment figures and the BoE minutes. The employment numbers are expected to show a jump, with the headline count poised to go over 2 million. The BoE minutes are likely to show an unanimous vote for the cut this month, but it will be the attitude towards future rate cuts which will excite the markets, with more cuts expected earlier next year. Today could against see the Pound on the backfoot against the Euro, although it may be a good day against the Dollar, as the US currency struggles with it’s own problems.
Michael Corcoran | Treasury Solutions | nabCapital