YB FX Daily Report – 12th March 2009
Rising stock markets reduced risk aversion yesterday and brought the Dollar lower across the board, although Sterling was unable to benefit. Sterling still sits around 1.38 against the Dollar, although overnight it has been up above 1.39. The Dollar did fall back as financial stocks in the US rose by 2.4%, dragged up by a further rise in Citigroups shares of 6.2%, and allowing the S&P500 to rise for the 2nd consecutive day for the first time in a month, although the overall rise on the day was only 0.24%. The reduced safe haven flow into the Dollar allowed the Euro to climb above 1.2850 against the US currency, however like Sterling it’s gain were only temporary as bad news out of China, exports down 25.7%, probably caused by reduced US spending, again raised doubts in investors minds and brought the Dollar back.
The Pound also had a tough day against the Euro in spite of the usual bad news out of the Eurozone, with German factory orders, expected to fall 2%, dropping a massive 8%. It is perhaps a sign how focused the currency markets are on financial news rather than the underlying economy, that the weekend’s events at Lloyds and the start of quantitative easing in the UK, have weighed on the Pound more than the terrible economic news out of the Eurozone. The UK’s quantitative easing measures started yesterday, and did seem to have some, very limited, effects on the libor rates, although with the total M4 money supply around 2 trillion Pounds, and only 2 billion gilts bought (increasing the money supply by roughly 0.1%), There is some way to go before more significant effects are felt. The Pound still dipped against the Euro, and currently sits below 1.08.
Like the USD, the AUD still has a relationship with risk appetite, although it is not as pronounced as when Australian interest rates were higher. The fall in Sterling this week has dropped the GBP/AUD rate down below 2.14, when it was above 2.20 at the start of the month, but the AUD had been hovering a few cents around 0.65 against the USD as it reacts to risk appetite. The Australian employment report released last night showed a small increase in employment figures, but more importantly a larger proportion of the workforce unemployed, and as the report is seeing as showing weakness in the labour market, a rate cut in April, previously seen as remote, is now on the cards. Even if Australian rates do come down, more in line with other developed nations, they Australian economy is still doing relatively well, which should support the AUD, especially if China starts to pull out of it’s doldrums sometime soon.
Today we get the ECB monthly report, and as many view the ECB as being overly optimistic about the state of the Eurozone economy, the assumptions in the report will be closely viewed. There is also German industrial production figures, which given yesterday’s factory orders collapse, could prove surprisingly weak. In the afternoon we get US retail sales which are expected to fall slightly. Sterling could struggle to make any headway even with the weaker industrial figures coming out of Germany until the effects of quantitative easing are more certain.
Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital