YB FX Daily Report – 23rd March 2009
Spring is in the air, or at least it was at the weekend before the wind started to pick up, and Sterling is starting to show some green shoots of recovery, as the cliche goes. Of course the 7 cent jump against the Dollar, from last Wednesday ’till today, is more to do with Dollar weakness rather than Sterling strength, but even at current spot levels, around 1.4550, the Pound can still be considered undervalued; with both currencies’ central banks committed to quantitative easing (QE) measures, and investors concerned over the long term prospects for inflation and the public deficit in the US, the Pound has further to climb.
Once tangential outcome of the Dollar’s decline has been Sterling falling against the Euro, as the single currency rose further against the Dollar than did the Pound (on a relative basis at least, the Euro also rose 7 cents, to 1.37), the Pound slipped down to around 1.06 against the European currency. With all the other central banks of what is considered the big 5 currencies, (US, UK, Japan, and the Swiss), devaluing their currencies through one way or another, the Euro is likely to stay strong until the ECB take similar action. Politicians had been grumbling about the strength of the Euro, although that was while it was up near 1.50 against the Dollar, and with the economic data out of the Eurozone as weak or even weaker than elsewhere, then the pressure on the ECB to act faster will continue to build.
Obama may have only been in power for roughly two months, but he has been busy in that time, turning the US into a communist state if you listen to some, but more specifically, churning out the package after rescue package for the failing financial and industrial sectors. The latest plan is to remove the ‘toxic’ assets from bank’s balance sheets, this time by giving incentive to encourage the private sector to help out. One big problem with this, and indeed the very reason why many assets are considered ‘toxic’ in the first place, is how to properly value these assets, which has yet to be worked out. With stimulus plans popping up in most if not all developed economies, the price of oil has started to creep upwards once more. After falling down below $40/bbl, the price has risen for the last 5 weeks, currently sits just above $50/bbl, and is likely to continue to rise as the supply is tightened by OPEC, while demand starts to rise.
It’s a busy week ahead for data releases, although with central banks now committed to extreme action anyway, the data has become a little less important. For the UK, we have CPI figures out tomorrow. expected to show a slight decline, although still remain above target, at least for now, while later in the week we have a couple of measures of retail sales, which are expected to show a decline, in line with general anecdotal evidence. The Eurozone has a lot of different surveys, including purchase manager’s indexes, and German consumer confidence, but until the ECB make it clear they are willing to take action the currencies strength, then the Euro will likely stay strong. Over in the US, the focus will still be on the QE measures announced last week, and what data there is will likely be swamped by market reactions to the influx of new money.
Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital