The currency blog

All eyes will fall today on Alistair Darling’s pre-Budget report today; for the FX markets close attention will be paid to the repayment of debt and growth forecasts along with the potential for a tax on UK bankers’ bonuses. All will be revealed later but the sentiment seems to be turning sterling negative as sterling has been sold off this morning against the Yen and USD. Today we have seen the UK October trade deficit widen to 7.1 billion against the forecast of 6.85 billion- not good timing for the chancellor as he looks to solve this ever growing issue. Other data from the UK confirms that whilst UK consumer confidence has come in positive, UK manufacturing output has stagnated in October and the British Chambers of Commerce downwardly revised its GDP expectations for 2009 and 2010. They are forecasting a 4.6% decline for GDP in 2009 and the 2010 outlook was lowered to 1% from 1.1%- it will be interesting to see how these forecasts align with that of Alistair Darlings later.
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That could be one reason for the fall in sterling since close of play yesterday. The Pre-budget report will set out government plans for tackling the UK deficit and also define growth forecasts. A big factor will be how the government plans to reduce the deficit which is a major issue for the UK economy and the next government- expect lots of political sabre rattling as Darling attempts to set out a fiscal election strategy. The government has promised to cut the deficit in half within 4 years and the market will want to see a viable plan for this to give comfort to sterling. Other items could include a change in the growth forecasts, cuts in spending and increased taxes- possibly on bankers bonuses or even banking institutions…Darling says his plan will maintain credibility with investors, while protecting people most vulnerable to the recession- it needs to.
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The surprise US non farms payrolls that came out on Friday took centre stage. A reading of -125k was expected but the actual data came out at -11k. This shook the markets, giving the USD a boost as investors scrambled out of most majors including JPY, GBP and EUR positions. JPY weakened by 2.4 cents, GBP fell 2.5 cents on the day and EUR fell by 2.7 cents. The far better than expected payrolls reading showed that US employers cut the fewest jobs in November since the recession began; this positive reading surprised the market and is a strong recovery sign. However, a large portion of the better than expected reading is attributed to the seasonal temporary increases in staff over the holiday period. It is not surprising that there is such a strong influx in temporary staff numbers as many companies have aggressively cut their permanent staff in order to cut costs.
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Yesterday was a day of mixed messages and movements in the FX markets. The USD lost ground against AUD and NZD but gained against the pound and the euro in later trading. The main event on yesterday’s calendar was the ECB interest rate decision; as expected the interest rates were left on hold but it was the eagerly awaited press conference that was the main event. The ECB took baby steps to scale back on their emergency measures as Trichet announced that they will terminate the one year tender in December and that the final tender will be offered at an average policy rate. They also announced that the 6 month tender will end on March 31- thus they are signaling a cut in the stimulus program. In essence this should be hawkish and euro positive but in typical Trichet style he fanned the flames by confirming that inflation will remain low and pledging to provide abundant liquidity for the first 3 months of 2010- therefore interest rates likely to remain low for some time. EUR/USD initially jumped towards the 1.5150 level before waning to 1.5060 later in trading.
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It was back to business as usual in the markets as the search for yield gathered momentum. The big loser was the Japanese Yen surpassing the USD as the currency of choice to sell in the thirst for yield. The recent stimulus from Japan and recent verbal attempts to weaken the currency are finally starting to undermine the Yen; USD/JPY is heading back towards 88.00 and GBP/JPY is back up at 146. The recovery trade is glaringly apparent again with equities gaining- the Nikkei up 3.3%; Gold hitting new highs and Oil gaining.
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The weeks are flying by and Christmas is almost upon us! But before we start on the long journey of excess that is the Christmas period, let us reflect on the successes of charity donations in November. Dress Down Fridays have been consistant again, and we raised £168.35.

The break down of this to each charity is:

The Children’s Society £64.68
Oxfam £50.99
RNIB £52.68

This has pushed the Co-operative Wall total to a very healthy £2706. December we are varying from our comfort zone a little and will be donating to just one charity!!

Watch this space for further details!