The currency blog

Sterling has again pushed higher on a trade weighted basis as optimism continues to grow on an imminent recovery in the UK. The National Institute for Economic and Social Research (NIESR) said output grew 0.1% in May and 0.2% in April. The data suggests that the UK has become the first major economy to exit the recession and follows improved industrial production data yesterday and better recent house market signals. The data in itself is not conclusive proof of an exit from recession but it has certainly helped sterling to move higher. The pound has hit a new 2009 high of 1.1737 against the euro, it is trading above 1.64 on the dollar and is still holding its head above 160 against the Japanese Yen. Bank Of England member Andrew Sentance also opined that Britain’s economy is on track to return to growth later this year. Personally I feel the optimism is overcooked and could lead to another false dawn for sterling but it is refreshing to hear some postitive soundbites following months of doom and gloom!

Risk appetite remains strong in the markets supporting sterling, euro, aussie dollar and the canadian dollar. Stock markets around the world gained last month as the total stock market capitalization icreased by almost $5 trillion in May, according to preliminary data released by the World federation of Exchanges. The gain in May gives three consecutive monthly gains with the largest seen in May and all 52 stock markets reported an increase in their domestic stock market capitalization- India led the way with a 44% increase. This recent improvement in global stock markets has led to further selling of the USD and the YEN. Sterling has gained due to the fact that it was pumelled in the downturn but the main gainer of late has been the AUD which is a firm favourite for yield based trades. The aussie was helped after China said that urban fixed-asset investment rose 32.9% in May following a government stimulus package of 4 trillion Yuan- more fuel for the risk appetite machine.

Last night the bank of New Zealand left rates unchanged at 2.5% and indicated that the recession may be neraing an end- this led to a surge on the NZD/USD cross and GBP/NZD to fad away from its approach to 2.60 and back towards 2.55.

Main economic data today will surround US retail sales and jobless claims this afternoon. US data yesterday was not particularly positive with the US trade deficit widening for a second month and the Fed Beige book indicating that many US regions deteriorated between mid April and May. An auction of benchmark 10 year treasury notes led to selling pressure on the USD and led to spreads widening to levels not seen since October last year.

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