YB FX Daily Report – 25th March 2009

YB FX Daily Report – 25th March 2009

Sterling continued it's rise yesterday after the surprise jump in the CPI rate made the prospects of a long term of deflation more remote. CPI rose to 3.2%, from 3%, when it was expected to fall to 2.6%, as this was a third month 1% above target, it meant a letter from the Governor to the Chancellor. King blamed the rise on the weak Pound, which is pretty rich when almost every action the central bank has taken has had the effect, intended or not, to weaken the Pound. The drastic rate cuts and the QE measures have dragged Sterling to record lows, and this has not only made imports more expensive, but also raised the prices of food stuffs such as meat, with farmers preferring to send their produce abroad where they can get a better price. Governor King spent the rest of his day speaking to the Treasury Select Committee; apart from putting his foot in it by speaking beyond his brief on whether the government could afford a further stimulus package, he indicated that there would be no more active encouragement of Sterling selling, and that he could see no more reason for Sterling to decline. It now looks like the landscape for Sterling has changed and the central bank are trying to encourage a stronger currency, after months of doing the opposite.

The Pound has started to rise against the Euro already, and also jumped up briefly against the Dollar. The Euro itself dropped back as comments from ECB members that more rate cuts are to come, hardly a surprise, and that there had been some discussions 'about how to use other available non-standard instruments.', which is a surprise, as many thought the ECB were far away from any other measures, and were likely to finish their rate cuts first. The Pound has climbed to just under 1.09 against the single currency, while the Euro has dropped back against the Dollar, below 1.35.

The Dollar is stuck at a cross roads at the moment, on the one had the QE measures have weakened it significantly, but then the latest Obama plan has led to some renewed optimism over the prospects for the US economy. The Pound had climbed to above 1.4750 against the USD, but has fallen back overnight. The stock markets have taken a break form their strong rallies, with the US markets ended slightly down or flat, and the recovery may be a little more ephemeral than many had hoped. Obama, and Brown, have been spending their time trying to raise the prospects of a coordinated stimulus plan when the G20 meet in London next month, which makes King's comments all the less welcome by the government.

We have significant releases in the Eurozone, the UK, and the US. The Eurozone's release comes form Germany in the form of the IFO survey, this has shown a fall to it's lowest level since reunification in 1990, the expectations measure rose slightly, but this has more to do with the current situation being so dire rather than any optimism. In the UK we have the CBI distributive trade survey, which is expected to fall slightly, as even though food retailers are holding up, other goods are likely to drag the overall figure down, while the US has it's durable goods order numbers for February, which are also expected fall.

The markets are more likely to be focused on the government and central bank actions than on the latest markets releases, and the general trend of Sterling rises seems to have been set, although this is a long term trend and is likely to reverse occasionally with traders taking profit from previous movements, something we can see today with rates falling slightly from London opening.

Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital

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