Sterling bucked the trend in the market yesterday, as general worries over global economy saw the Euro fall, and the Dollar rise on safe haven demand. The latest problem to raise it's head yesterday was the weakness of the Eastern European nations and their ability to fund their budget deficits, plus the weak nature of many of their banks, with Moody's warning of a potential downgrading of credit ratings. European banks have a lot of exposure to this market, and the Eurozone has a whole could suffer with the German finance minister raising the prospect of a bailout, and singling out Ireland, which although not eastern European, are still in danger of having their sovereign credit rating downgraded. The Euro fell to a 2 month low, below 1.26, against the Dollar, and in spite of a better than expected German economic survey, also fell against the Pound, allowing the UK currency to climb towards 1.13 against the Euro.
The Pound actually rallied against the Dollar, in spite of safe haven demand for the US currency, as yesterday's UK inflation figures actually fell by less than expected. Stock markets have fallen around the globe with the S&P down over 4.5%, and the FTSE down 2.4%, but the Pound still managed to strengthen. CPI inflation was expected to fall to around 2.6%, but the figure was actually 3%, as the VAT cut has still to completely pass through to the numbers, and discounting before Christmas reduced the impact of January sales. The RPI measure, which includes house prices, fell to just 0.1%, the lowest level since 1960. The inflation figures are not going to change BoE policy although it should at least delay, if not stop, talk of deflation. Sterling made headway against the Dollar ascending to 1.43, but has been knocked back overnight to hover underneath 1.42.
The Australian Dollar did not fair as well as the Pound, dropping over 1.5c against the Dollar, although the usual correlation of a rising Japanese Yen, has not come about as the Japanese economy suffers under it's own blight. The AUD has been suffering along with general risk appetite and stock market falls. Yesterday's RBA minutes, showed a prospect of further cuts in the Australian bank rate, maybe not as much as the two previous 100bp cuts, but a further cut of 50bp is certainly possible. So it seems the Australian Dollar will be kept on the defensive, with further rate cuts on the cards, and declining global equity markets, whether the Pound can take advantage of this is another thing. Sterling still sits around 2.22 against the AUD, which although higher than the start of the year, when the rate was around 2.05, is still a long way of previous highs of over 2.6 only a few months ago.
We've just had the release of the BoE minutes and unsurprisingly it was an 8-1 vote for the 50bp cut, with Blanchflower yet again the dissenting vote calling for a 100bp cut and arguing that rates needed to go as low as possible as quickly as possible. However the overall tone of the minutes suggest that the MPC were concerned that cutting rates further would erode saving deposits, and hurt bank income. The MPC did vote 9-0 to seek government approvals to start quantitative easing measures such as buying gilts, and commercial paper. They think that it is unlikely that the CPI target can be met by interest rate moves alone. It now seems that some form of quantitative easing is coming, and Sterling has fallen back after this news, down to 1.41 against the Dollar, but still above 1.12 against the Euro.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital