YB Currency Update – Wednesday 9th September

YB Currency Update – Wednesday 9th September

The headlines are full of the rise in price of gold, which hit above $1000/oz an ounce again yesterday. The inverse relationship with the value of the dollar still holds, so as the price of gold rises, the value of the Dollar falls, whether this relationship is just correlation or causation is unclear, although as the price of Gold is measured in Dollars as the Dollar falls the price of gold will go up, however there seems to be more factors in play than just this, with gold being used as a store of value which is inflation proof, apparently an ounce of gold would buy you 350 loaves of bread in the times of Nebuchadnezzar (about 2,600 years ago), and it would buy about the same number of loaves today, which doesn't make it a great investment vehicle, at least not over thousands of years, but does prove it's inflation invulnerability. The fears of inflation are also one of the factors hitting the Dollar, with it's status as the worlds leading reserve currency once again raised as a point of discussion, with a Chinese official pointing out that the QE measures the US have introduced could ramp up inflation in the coming years, and cause a crash in the Dollar, in which most of the Chinese government reserves are held. The Dollar index has fallen 1.2% taking it to near a one year low, which has allowed the Pound to climb above 1.65, although it has fallen back in this morning's trading, and the Euro to get to near around 1.45.

The UK was the benefit of some good news yesterday (in spite of Andy Murray, the Briti....Scottish player's defeat) as Industrial production rose for the 2nd consecutive month, with manufacturing production rising by 0.9%. Manufacturing is a very volatile, and seasonal, sector so the figures may not be the start of a strong rise out of the recession, but coupled with the National Institute of Economic and Social Research estimating that the three months preceding the end of August saw positive GDP growth, by 0.2%, there is a greater sense of optimism around the UK. The Pound may have benefited from that optimism against the Dollar, however it made little impact against the Euro, against which the Pound is still subdued hanging around 1.14, possibly due to concerns over tomorrow's MPC announcement, although the latest news makes it harder to justify yet more fiscal expansion.

Both David Cameron, and Chancellor Darling gave speeches yesterday, talking about the need to make spending cuts to keep the UK's credit rating. Moody's have reassured the markets that there is little chance of the major economies losing their triple AAA rating, but there is still no doubt that there is a need to bring down the national debt, the main issue is when and how. The Conservatives are trying to tie in the need to cut spending, which is after all their natural political stance, with the revulsion over the MP's pay scandal, although the money a 10% wage cut will save will be but a tear drop in the ocean of debt, and there only other announced cut is ID cards; while the Labour party are arguing for more spending to make sure we are out of recession, before cutting spending, while at the same time protecting front line services by making the cuts with efficiencies, why these efficiency cuts are not constantly being made is the question that should always be asked of all public services.

There has been some more good news this morning with tentative signs that the labour market is slightly improving, while the trade deficit is not coming down as much as many had hoped. Later on we get the BRC shop price index which will give us an, unofficial, look at inflationary pressures,which could be sharply downwards as this time last year saw the peak of inflation, while this afternoon we get the broad scope on the US economy from the Fed's beige book. The Pound is still likely to remain subdued, excepting another bought of USD weakness, ahead of tomorrow's MPC announcement.

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