YB Currency Update – Monday 8th February 2010
It is sometimes said that the seeds for the next financial crisis can be found in the measures taken to combat the previous crisis; normally when there is 10 years or so in between it is easy to separate the two, but the current crisis, which has been trundling along now for almost 3 years, has spread from sub-prime mortgages in the US, to the worldwide banking system through collaterised debt obligations, and dragging in other financial institutions through credit default swaps, central banks and governments acted to rescue the banking system, and now those actions, coupled with the structural problems in their finances even before the crisis, has brought a number of European countries into the heart of the crisis. Although the total amount of debt is a worry for these countries it is more the annual deficits they are running, i.e. income vs expenditure, which is worrying the markets. The Eurozone has a 3% deficit limit for it’s member states, and Greece is currently running at almost 13%, Spain aren’t too far behind, with Portugal Italy and Ireland, also in the spotlight. The UK’s deficit is comparable to the struggling European economies, although we are not hampered by the ECB’s rules, and have more control over the financial tools to use, the deficit will still be needed to be brought down; in the end it will require tax rises and spending cuts to bring the deficits back down.
As the fears for the Eurozone countries grow, risk aversion has re-entered the markets, and Friday’s non-farm payrolls report hasn’t helped falling by 20k, when a 15k rise was expected. There was significant revisions to previous months, totalling another 245k job losses (also proving how useless the monthly headline figure really is), although this was coupled with a fall in the unemployment rate from 10% to 9.7%. The markets reacted to the headline figure by running from anything seen as risky, which has hugely benefited the Dollar sending it to 7 month highs against the Euro, bringing the EUR/USD rate down to almost 1.36, while the GBP/USD has slipped down to almost 1.55 in early trading today, although it has bounced back a little as the day as worn on.
Sterling has suffered against the Euro as yet more polls show that the Conservatives might not make the cut to form a majority government in the upcoming election, and are actually about 8 seats short. The Conservatives have actually toned down their previous harsh rhetoric on belt tightening after finding that it didn’t go down as well as they thought it might with the electorate, but the markets still think they are the party that are most committed to reduce the deficit, and the Pound is likely to continue to suffer as the election remains uncertain. The Pound has slipped against the single currency, down to 1.14 over the weekend.
Sterling may suffer this week as there is a distinct lack of data to give it any direction. We have private survey’s of house prices and retail sales overnight tonight, and Wednesday has some manufacturing figures plus the quarterly inflation report, but they are the only releases of note. Today is a quiet day for data globally, so the currency markets will be left to the whim of risk appetite, and although the Pound has recovered some of it’s losses from late Friday it is unlikely to recover further throughout the rest of today.