YB Currency Update – Monday 3rd August

Last week started with a panic as comments from the Chinese authorities caused a stock market fall, however throughout the week, comforting noises from the Chinese authorities, as well as some better than expected corporate earnings, and even some surprising macro economic news gave the markets a fillip. The market ended the week the opposite way it started with US GDP figures coming in better than expected with a 1% annualised fall, compared to an expectation of a fall of 1.5%. The optimism was tempered by downward revisions to previous months, but even so the currency markets have reacted with increased risk appetite, helped along by signs of Chinese manufacturing growing for the fifth consecutive month.

So the increased risk appetite helped Sterling take a step higher towards the end of last week, and this morning it has bounded up a few more steps as Barclays announced improved profit figures, 8% up from the same time last year, which is even more impressive as this time last year was before the Lehman brothers collapse, which altered the markets so much. It is perhaps ironic that the strong figures were mostly supported by Barclays Capital the ‘casino banking’ part of the business, and the type of banking that has drawn so much criticism. Barclays haven’t taken any government money directly so they don’t have to answer to any government shareholders for their actions, although they have benefited from more of the systematic government interventions to free up capital in the markets.

Coupled with some solid, but less spectacular, HSBC profit report, the Barclays figures have sent Sterling even higher this morning, allowing it to break above 1.68 against the US Dollar, and to touch 1.18 against the Euro. The increase in risk appetite has depressed the Dollar allowing the Euro to climb above 1.42, while the higher yielding currencies, the AUD and the NZD have made large gains against the Dollar, although they have stayed steady against the Pound keeping around 2.0050, and 2.53 respectively.

It is a bumper week for data this week with PMI for manufacturing released this morning, good figures for the UK have contributed towards Sterling’s performance, while the rest of the week sees PMI for services and construction in the UK, rate decisions for the ECB and the BoE, and to cap the week off we have US non-farm payrolls on Friday. Sterling has put in a very strong performance in the last couple of days, and whether it can build on this performance, or even hold it’s gains in the face of such a busy week is far from certain.