The currency blog

The potential trade dispute between China and the US cranked up another notch yesterday as US law makers voted overwhelming in favour of measures that would allow levies to be placed on US imports of Chinese goods. The bill would have to be ratified by the Senate and President before any action is taken, and this is unlikely to happen until after the mid-term election in early November, but the US is hoping the threat of action is enough to spur the Chinese into further appreciation of the Yuan. But as the US knows, we are in a very different position from 1985 and the Plaza accord. China is in the position of strength and direct threats of manipulation by the US will be as effective as a one legged man in an ass kicking contest in forcing the Chinese to deviate from their gradualist economic plans. The Dollar trades lower on the news in cable, but with US GDP figures out this afternoon and the Federal Reserve’s finger firmly on the QEII trigger, expect volatility when the US opens early this afternoon. The figure is forecast for 1.8% year-on-year, so any figure south of that will send Sterling, which has all the momentum at the moment, higher against the USD.
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Rumours are circulating that the Fed will commence a second period of asset purchases or QE2 as early as November. The weaker than expected level for US consumer confidence in September published on Tuesday has only supported this feeling as sentiment continues to be hit by job market concerns. Consequently, the USD remains under pressure, with little sign of stopping. The potential of further USD unravelling as well as interference in many countries to avoid their currencies from strengthening against the USD continues to influence gold prices which hit a new record high, smashing through the $1300 per troy ounce mark. In the present financial situation it is hard to see gold prices turning much lower, however there will be the usual bounces as profit taking occurs.
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GDP figures for the UK were released this morning showing a rise of 1.2% QoQ for the 2nd month in succession leading to a strong start for Sterling against its rivals. The leading indicator of economic health also illustrated an increase of 1.7% YoY painting the picture that the UK economy is steadying and looking at sluggish, but stable growth. The news has kept the pound above 1.58 against the Dollar, but also seen it bounce back over 1.18 in trading vs the Euro. This has also been on the back of comments from the IMF and the BoE. Firstly, the International Monetary Fund endorsed Chancellor George Osborne’s deficit reduction plans stating that the UK was “on the mend” and added the plan “greatly reduces the risk off a loss of confidence in public finances and supports a balanced recovery”. Secondly, BoE Deputy Governor Charlie Bean said the central bank wanted households to “spend more rather than save”.
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Today marks the start of a busy week in the FX markets. A large amount of important data releases are scheduled for release this week and several prominent central bankers are due to speak. This is set against the backdrop of further intervention by Japanese authorities, aimed at curbing Yen strength and further grumblings by the US of China’s refusal to let the Yuan appreciate to fair levels against the Dollar. The Greenback is yet to recover from last weeks Fed meeting and continues to struggle across the board, this afternoon the Chicago Fed National Activity Index will probably show a further slowdown in economic activity so expect the Euro and Sterling to cling stubbornly onto the gains from last week until tomorrow. Later in the week US GDP is announced, with forecasts of a slight increase from 1.6 to 1.8 per cent. The Fed & markets will be following the figures intently, as disappointing figures may mark the start of the “exceptional measures” the Fed mentioned in the last meeting.
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The big question economists are asking how long the recent Euro strength / Dollar weakness will last?

Price action topped at 1.3438 yesterday despite weaker Eurozone data in the form of Eurozone PMI.  The rate held above 1.3335 which, coincidentally was the exact level we were at in August before the Euro decided move south and dip to 1.2600. Today is a quiet day in terms of data, the current level could make the German IFO release at 9.00am this morning very interesting. Once again, the potential difficulty is the future expectation component and if, as seems likely, the position for the German economy remains ominous, coupled with the concerns over Eurozone sovereign debt issuance requirements, the present value of the Euro may demonstrate a little over reaction. However, numbers in line should see Euro/$ have another quick sniff at 1.3400.
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Back in July I submitted copy for a well known expat magazine. This copy was for their September issue. In this article I suggested that euro buyers should watch out because between August and October 2009 the pound lost nearly 10 cent on the back of less than positive sentiment expressed by the BoE and the Treasury. Although circumstances are slightly different now what with the sovereign debt, credit and unemployment issues being significnalty worse, I feel somewaht vindicated.
Strerling has seen a loss of around 4 cent over the past week. The UK has had her growth forecasts for 2011 reassesed downwards, mortgage lending is at a significant low, youth unemployment is high, and after a very wet end to the summer it is no wonder that the cracks have begun to show and the Lib-Con’s coalition honeymoon is coming to an abrupt end. It would be wrong to say it is likely that the pound will continue to loose value in the short term because the PIGS still have serious issues with their public spending, austerity and borrowing capabilities, but the mood of the markets has changed ever so slightly, and we are loosing the momentum that carried through 1.20 and the summer season.