YB Currency Update – Tuesday 19th May

YB Currency Update – Tuesday 19th May

It was a quiet day on the data front yesterday, but the Pound still put in a good performance, surging up against both the Euro and the Dollar. Stock markets rose once again, this time helped by political news out of India, as the congress party emerged from the elections, not just as the largest party, which was expected, but also able to form a government without the need of the support of some of the fringe parties, such as the communists. This has raised expectations that India now should be able to pass legislation to clear some of the structural blockages the market thinks is holding it back, such as barriers to foreign investment and a narrowing of the budget deficit, The Rupee rallied after the result along with Indian stocks, which rose by 17%.

The stock market rise continued over to America with the S&P500 rising by 3%, and this has weakened the Dollar, allowing the Pound to climb to almost 1.55 this morning, while the weak GDP data seems to be finally weighing on the Euro, allowing the Pound to rally above 1.1350 against the single currency.  The Pound has benefitted from the rise in the stock markets and it is likely to fall if the stock markets dip. We have already had a 5% correction in the S&P500 last week, but as the markets rose by 37%, many expected a larger fall. Equities are finding it harder to rally now as many investors have stopped seeing stocks as underpriced. There are risks of further correction in the stock markets, and this could knock the Pound lower, but if the end of the recession carries on as some expect, then it will only be temporary setback.

The stock market rally has also had the usual effects on the Yen and the AUD, two currencies which are on the opposite sides of market sentiment; the Yen, like the Dollar is boosted by safe haven demand when markets fall, while the AUD, being one of the higher yielding currencies, benefits from stock market rises. As you would expect after strong rallies in US equities, the AUD has risen pushing the Pound down to below 2 again, while the Yen has gone the opposite way, weakening to the point that the Pound has almost reached Y150. The collapse in the markets has strengthened the Yen, the Pound was at Y210 only last year, and the strong currency has worsened the effects of the global crunch on the Japanese economy, with a disastrous collapse in exports, so the Japanese government may be welcoming the currencies slide.

There is a couple of important releases in Europe today, firstly the UK CPI figures. These are expected to fall as the utility bill cuts start to feed through, although there will be a counter pressure from a rise in petrol prices. The CPI number is expect to come in at 2.4%, falling down towards the BoE's target after proving surprisingly stubborn in previous months. It has just been released and actually came in slightly lower at 2.3%, while the RPI actually came in at -1.2%.

Later this morning we get the German ZEW index, which will be closely watched after last weeks GDP fall. The index is expected to show recovery, but will still be staying at near record lows, proving that it is going to take some time for the German, and Eurozone economy to recover.

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