The currency blog

With sterling and euro sticking within a predictable range, averaging about a cent oscillation over the last four UK and European sessions, it is clear that the summer lull is in full flow…

The pound closes up at 1.2028 by the end of trading on Friday. All eyes appear to be on the dollar which has been hit hard by gains against both the euro and the pound. US GDP did not reach the levels that were expected. When contrasted with the GDP figures released from the UK one can argue that sterling has had a bit of respite as attention had turned towards Ministers in Europe and US. Sterling may move decisively over the next week or so. Speculators anxious to push levels are likely to capitalize on negative Eurozone sentiment, so we may see the 1.21 level tested, and when one considers that the first week of this month will be rich in data, we should hold tight for a surprise shift to a more positive out look for the pound in the long run.

Of late, UK economic data has been extremely positive. However, since yesterday this trend has been broken. Overnight GfK Consumer Confidence fell by more than expected to -22 (consensus -20, previous -19). This follows yesterday’s news that house prices fell by more than expected in July, coming in at -0.5% m/m (consensus -0.3%, previous 0%). It appears that concerns about the medium-term impact of fiscal austerity measures on personal finances is outweighing any potential optimism about the recent recovery’s momentum, thus keeping demand low. In other data, both mortgage approvals and mortgage lending in June fell more than expected and M4 money supply was unchanged for June. Despite this negative development, sterling continued its recent surge against the US Dollar and managed to close at levels not seen since February of this year. Significantly, sterling is well supported ahead of a key technical level, the 200 day moving average of 1.5543.
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The Governor of the Bank of England, Mervin King, warned yesterday that a continued economic recovery was still unsure and that inflation is likely to remain above the 2% target for the next year.  King delivered a rather frank message to banks saying that their harsh treatment of corporate clients was leading to a “heartbreaking” situation in Britain’s small and medium sized business sector.  He said “It is a very tough job to build up these businesses and I do think that we need a pattern of finance that respects the need for these longer-term relationships.” Mervyn added “They [small and medium-sized companies] may have had the same banking relationship for 60, 80 years and then suddenly out of the blue, comes a letter churned out by a computer which says that the terms of our relationship have changed.”  The bearish comments tempered Sterling slightly but that didn’t stop the Great British Pound hitting a fresh 5 month high against the USD following recent robust economic indicators and we are now trading at 1.5639 on cable.

The land registry on Wednesday said that house prices in the UK rose by 0.1% in June which brings the new average home price to £166,072 which is still 8.4% higher that a year ago.  These values demonstrate a return to value last seen in the summer of 2006.

Over to the other side of the pond and the pessimistic tone of the latest Fed Beige Book, published on July 28, echoes the weakness evident in U.S. economic activity data. Though economic activity improved on balance, districts reporting improvement indicated that the increases were “modest,” two districts reported no increase in activity and two others reported slowing activity. Retail sales were generally positive, though gains were modest in most districts. Sales of necessities were stronger, while “big ticket items moved more slowly.” Manufacturing activity continued expanding, though several districts reported slowing or flattening, while services sector conditions improved. Residential real estate activity was “sluggish in most districts” after the homebuyer tax credit expiration, and commercial construction remained weak. Some districts reported “soft or decreased” loan demand. Labour market conditions improved modestly, and on a positive note, there were “several reports of temporary hiring.”

The staggered road to recovery has been blamed for high unemployment and low consumer confidence. The latest figures will do nothing to reduce fears that US economy is slowing as opposed to recovering. The latest headache for the Fed comes from the West coast as Governor Arnold Schwarzenegger announced yesterday a state of emergency over the state’s finances. This raises pressure on lawmakers to negotiate a state budget that is more than month overdue and will need to meet a $19 billion shortfall.

Sterling received another boost this morning after a leading think-tank announced that Britain will avoid a double-dip recession and its economy will expand at trend growth rates as early as 2012. In the latest forecast from the National Institute for Economic and Social Research (Niesr), it predicts GDP growth of 1.3% this year, 1.7% next year and 2.2% in 2012. The news follows recent strong economic data over the past week where GDP and retail sales figures shocked the market on the upside. The pound has surged to 5 month highs against the dollar and the general consensus is Sterling will continue on a long term rise against the Greenback. Merv “the swerve” King will be speaking today and as usual, I’d expect “doom and gloom” comments from the BoE chief. Most likely on his radar will be the GDP figures from Q2 which showed a rise of 1.1% QoQ (0.6% forecast).
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One in fifth of the 7.66 trillion yuan (1.1 trillion dollars) that Chinese banks lent to local governments is “at serious risk of default”, is the latest potential default risk problem to halt the global recovery. Chinese banks lent vast sums of capital to local Chinese governments for construction projects after Beijing called for nationwide efforts to stimulate the economy. However, only one quarter of projects financed by the loans have the ability to meet repayments, according to the Century Weekly. The banking regulators, along with the banks that have the biggest exposure, will carry out detailed discussions with local governments starting in September about how to recoup the loans, the report said. China has powered out of the global crisis on the back of a stimulus package worth four trillion yuan and the state-backed bank lending, which saw new loans nearly double from the previous year to 9.6 trillion yuan in 2009. This latest potential default raised concerns in Beijing over a possible new crop of bad loans that could threaten the world’s third-largest economy. The question is will the fresh concerns undermine the AUD in the short and medium term?
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The results of the Eurozone bank stress tests were eventually released on Friday evening showing only 7 of the 91 banks tested were deemed to have failed, and the capital shortfall was estimated at €3.5 bn. Both are very much at the lower end of consensus forecasts, raising questions over the credibility of the tests. Interestingly, a sovereign default or restructuring scenario was not included, as media leaks earlier in the week had suggested. At the press conference, ECB Governing Council Member Constancio justified this decision by noting that “instruments have been put in place precisely to avoid that scenario”. Nevertheless, as the leaks had suggested, many participating banks voluntarily disclosed their sovereign debt holdings, and this has brought some improved transparency on sovereign debt exposure. This seems to have averted any euro selling pressures as the single currency continues to trades close to Friday’s 1.29 range against the dollar. Read the rest of this entry »