The currency blog

Yesterday we saw a fresh seven month high against the dollar and a six month high against the euro. The pound made early gains in the markets yesterday and consolidated those gains overnight. The pound is galvanizing on signs that the global economy is recovering following huge depreciation as the economic crisis unfolded. The key drivers in the market remain activity in the equity markets and the sentiment to buy higher yielding and riskier assets. Recently the markets have been boosted by gains in Asian stocks- in particular commodity stocks, this was fuelled by improved sentiment from China. This is leading to a move out of USD predominantly and also other low yielding currencies are shedding earlier gains- such as the Yen and the Swiss Franc. Low interest rates and improved confidence are naturally causing higher yielding commodity based assets to be sought…CAD, AUD and NZD looking strong.

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The USD has tumbled to lower levels against a basket of currencies…the pound has jumped to 1.64 and the euro has advanced to 1.42 against the ailing US dollar. The US dollar fell as signs of a recovery in China boosted global confidence- this is significant as China is the worlds third largest economy and optimism and recovery here will go a long way to boost the global recovery. The Dollar index which is a measure of the strength of the dollar against a basket of currencies dropped to the lowest level this year and there is a galvanizing push to sell the currency. Economically the Q1 GDP confirmed the worst six month period for the US economy in 51 years, debt levels also remain a major concern- the Congressional budget office projected the US budget deficit would quadruple to about $1.8 billion. On top of this there is still a question mark looming on the US sovereign debt rating- heightening calls for a move out of US dollars as a reserve currency. Technically the USD could target 1.68 against sterling. Ultimately the weakness in the US dollar will ultimately lend to improved economic conditions with increased exports compensating for a public not spending.

The dollar was not helped by the news that GM is officially slipping into bankruptcy- although this has been widely expected it added to the dollars woes. The US government will step in to tale ownership of the car giant further spiraling the government spending.

This week a main focus will be on the rate announcements from the Bank Of England and the ECB. No further easing is expected from the BoE but there may be further talk or action in the QE programme. In the eurozone CPI a measure of inflation came in at 0.0% for May- this is the lowest on record. This falling inflation indicator naturally raises the concern for deflation in the euro zone, however ECB president Trichet brushed these fears aside stating that ‘Long-term inflation expectations in the euro area, whether based on surveys or extracted from financial indicators, have been and continue to be firmly anchored at levels consistent with our definition of price stability.’   This week we will wait to see if the ECB look to cut interest further from 1% and also to see if the ECB expands its programme to buy covered bonds to revive private sector lending.  Speaking in Marrakech, Trichet said ‘We expect to engage in a programme of around 60 billion euros that targets an important segment of the private securities market which has been particularly affected by financial market turbulence’.  This in theory should weaken the euro and help sterling gain above the recent high of 1.1535.

On Friday we see non-farm payrolls from the US…an awful -525k is expected and anything -500k or better will be considered positive.