YB FX Daily Report – 13th May 2009

With (cynics would suggest) our elected representatives making a noble contribution to the improved retail spending figures released on monday night, Sterling made gains against the Dollar, Euro and Yen yesterday despite mixed news for the FTSE100. Hitting a four-month high, Sterling rose above 1.53 against the dollar throughout the day, where it is currently still residing. The Euro also struggled, with a sceptical response to plans by the German Finance minister (himself a keen critic of the rescue plans devised by many of his international counterparts) to create a German ‘Bad Bank’ to cleanse the country of its estimated EUR850bn of toxic assets.

The dollar is out of favour, dropping yesterday to a four month low on a trade weighted basis, a seven week low against the Euro, and also suffering against the Yen. The dollar has remained on the defensive following reports that the US’s AAA credit rating was potentially facing a downgrade should the government fail to show that its finances are back in order. Whilst it is doubtful that such a downgrade would happen given the possible damage that would cause to the financial sector, weak US fiscal dynamics are a reminder that the dollar will struggle to find support in the months ahead.
Furthermore, renewed optimism across global markets will no doubt continue to hurt the Dollar as risk appetite returns. Indeed, leading central bankers have this week signalled that the downturn in the world economy had bottomed out, with some large economies already able to look forward to renewed growth, a view suppported by the gains already made on the worlds leading equity indices over the past 30 days:

Today has already seen slightly worse than consensus industrial production figures for the Eurozone, showing a YoY 20% decline from last March, whilst the Bank of England will shortly be giving its much anticipated quarterly inflation report, where we’ll get headlines on CPI and GDP projections, followed by Governor King’s opening address where the main focus will be what the BoE says on inflation and QE. He is expected to underline and expand on last week’s MPC meeting statement that noted the slowing pace of economic decline at home and abroad.

With this speech expected to be slightly cheerier than the last one he gave, it may be interesting to see how much strength GBP takes from this over the coming days.

Jonathan Smith | Assistant Manager, Treasury Solutions UK | Wholesale Banking | NAB