YB Currency Update – Monday 2nd Feb 2010

There was a small reversal in risk appetite yesterday, helping stock markets rise for the first time in a few days. One of the drivers was a rise in global manufacturing, with the UK playing it’s part as the PMI for that sector showed a surprise rise to the strongest level since 1994. Of course manufacturing is only 14% of the UK GDP, and the PMI does not measure total output, it is just a survey of activity. Other economies also reported decent manufacturing activity, and this allowed the markets to ignore a downbeat US budget, in which Obama confirmed that borrowing would still be at record levels next year, also removing the ambition, plus the funding, to get a manned mission to the moon. The rise in risk appetite has brought the Dollar a little lower, however until the markets are reassured over the unity of the Eurozone and the pace of Chinese fiscal tightening, they are likely to remain nervous.

The Pound failed to gain any traction from the strong manufacturing figures, remaining around 1.59 against the Dollar, and around 1.1450 against the Euro. Weighing on the Pound is a little uncertainty over the MPC’s announcement later this week, in which it is likely they will announce a halt to QE, although it is not certain. Once again politics has interfered, with another poll showing the Conservatives’ lead cut to 7 points, and the prospects of a hung parliament has weighed on the Pound. There was some slightly better news for the Eurozone with the cost of Greece’s debt starting to narrow for the first time n a week, showing a slight easing of tension, although it will take a lot more before the markets are calmed.

We’ve had the first rate decision of the week, and as the Australian central bank was expected to raise rates to 4%, the decision to keep it at 3.75% came as a shock. The RBA said they were waiting to look at the impact of their previous rate rises, but the have left no doubt that more rises are in the pipeline saying ‘monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.’. The surprise decision has brought the AUD lower, below 0.89 against the US Dollar, and allowed the Pound to recover some of it’s losses from earlier in the week.

Today is relatively quiet compared to the rest of the week, with just the PMI for construction released, which has come in slightly better than expected, but this has given the Pound little benefit, and it is likely to remain on the back foot going into tomorrow’s PMI for services and Thursday’s BoE meeting.