The currency blog

Yes today is the pre-election budget which Alistair Darling will unveil to the House of Commons this afternoon. So what can we expect from Mr Darling today? Will he be specific and open about how the government plan to reduce the deficit by half within 4 years? Very unlikely…today is the last chance saloon for Labour to dance around the realities and focus upon trying to get re-elected. Expect to see bashing of financial institutions and for Darling to drum home the point that early cuts or the Conservative policy could spin the economy back into recession. One item that would help this argument and sterling is the expectation of the announcement that the government borrowing forecasts are expected to be revised down from 178 billion…depending on how much it is revised down will be key for sterling. I would expect to see the budget on this basis to be slightly sterling positive as the financial markets do not expect clear plans on reducing the deficit- the post election budget will be much more relevant for this regard.
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Not a great deal of movement in the FX markets- the pound is currently just under the 1.50 level and a touch over 1.11 against the euro. The pound has lost about a cent against the USD in early trading as the markets remain nervous on the budget outcome. In addition the pound is a little softer in relation to UK inflation falling (although very slightly) for the first time since September- the fall will be welcomed by the BoE who predicted lower inflation for the second half of 2010. However the rate which now sits at +3.0% year on year is still a full 1 per cent above the target level of 2%, the pound is lower as falling inflation could lead to further Quantitative Easing in the future.
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UK attention is very much centred on Wednesday’s budget statement from Alistair Darling - very likely to be his last even if the Labour government are somehow returned to power. The press is full of helpful advice for the Chancellor, mostly telling him what NOT to do, and there is so much of this that the statement itself might well set a record for brevity. He is assumed to have the ‘good news’ to tell of a reduction in estimates for the UK’s borrowing requirement for this year and the next few years to come and will probably upgrade his growth estimates on the back of last quarter’s GDP figure and the predicted estimate for this quarter’s number. Could be Sterling positive in the short spell on or around delivery but the cloudy outlook for the whole political situation at present is more likely to leave investors wary and hence leave the currency vulnerable.
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Someone may have been doing some rough calculations as to how much German taxpayers will end up in hock for if an EU rescue package for Greece is forthcoming….. and the politicians didn’t like the outcome. This provoked comment from Chancellor Merkel that mirrored those of her Finance Minister earlier in the week which in effect dismissed chances of a monetary rescue package from within the Community, instead directing the Greeks to the IMF. The Greek prime Minister took up the challenge, complaining about the delay in any progress and apparently resolved to the fact that Eurozone cash was not on the table. He told the European Parliament that his country was running out of patience and that in fact Greece was already subject to a ‘full IMF austerity regime’ but without benefiting from any of the IMF related advantages i.e. reduced cost of funding. He said that savings that they were achieving through the strict cost cutting measures, rather than going to reduce their budget deficit, were finding their way into the pockets of bond-holders through spiralling interest rate costs. As if to back up his argument, Greek 10-year bond yields yesterday spiked again, up by 17 basis points to 6.26% - this as opposed to the 3.15% yield currently seen in the German equivalent. On the back of the wrangling, the Euro dropped by a couple of cents against the Dollar. Personally, it looks as though the Euro still has further to go with the attempts to project unity amongst the Euro zone members dissipating by the day. Next week’s EU summit meeting is assuming evermore importance given that the immediate future for the Euro itself could depend upon what emerges - expect markets to be very dubious heading into the Thursday start. Read the rest of this entry »

The pound has so far held onto yesterdays gains following the unexpected fall in the unemployment claimant count. The market welcomed the data along with the unanimous decision from the Bank of England to hold on QE. If you look at the employment numbers more closely the headline figure shrouds weak underlying trends in the labour market- however this was ignored for now by the markets and the news provided a rare opportunity to buy the pound. Already today we have seen the dreaded Public sector net borrowing data come and go without any nasty surprises- the data was actually better than expected with PSNB at 12.361 bln against the forecasted rise to 14.75 bln for February. In other data mortgage approvals for the UK sunk to 48k identifying further sluggish lending in the housing sector. The pound seems nicely consolidated above 1.52 and 1.11, however it is unlikely to see further big moves now until next weeks budget.
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And it came in the form of the unemployment numbers…the number of Britons claiming unemployment benefits fell unexpectedly by 32,300 in Feb against the expectation for a rise of 8,000. January’s reported rise of 23,500 was also slashed to 5,300. This fall is the biggest monthly fall since November 1997 and the claimant count rate eased to 4.9%- the lowest since August 2009.

This is timely feedback on the job sector for the Labour government as we draw nearer to election day. Although the data is certainly encouraging we should not carried away as there is still a significant risk of a stuttering recovery. The labour market is still adjusting to fragile market conditions and this will lead to schisms in employment data. Looking forward we still have the threat of sharp public sector cuts which will lead to a rise in unemployment going forward. The pound has welcomed the news by rallying sharply against the USD and the Euro- gaining over 1% against the USD and 0.8% against the euro. This is a welcome relief rally for the pound which has been on the ropes especially since the beginning of March. The pound was also lifted by the MPC minutes which showed a vote of 9-0 to hold interest rates and QE. The unanimous decision has helped ease fears of further QE and division within the MPC.
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