The currency blog

The start of this week marks the one year anniversary of the collapse of Lehman Brothers when the financial world was turned upside down. Within a close time span of the collapse of Lehmans we witnessed the ripple effect as Halifax Bank of Scotland was swallowed up by Lloyds; we then saw Bradford & Bingley nationalized and further down the line Lloyds and RBS propped up by the UK government. As we recalled the crisis in UK banks ultimately shook the confidence of sterling to the very core and we experienced a seismic shift in the exchange rates with sterling falling swiftly against the euro!

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As expected the Bank Of England left interest rates unchanged yesterday and also did not expand the QE measures any further from the £175bn current level. This gave sterling a swift boost as it pushed higher across the markets- gaining on the USD and the EUR. Further good news today from the UK as UK August PPI input prices came in at +2.2% stronger than forecasted and the highest since June 2008, output prices came in close to forecasts at +0.2%; GBP/USD has today touched over 1.67 and GBP/EUR has gradually climbed to 1.1450.

The USD is still under immense pressure across the markets losing against most currencies with EUR/USD peaking over 1.46 and NZD/USD hitting a yearly high. The problem with the USD is that it has broken past key levels and the momentum is still there. In addition economic news is still coming in positive which is a natural USD sell; most notably we had improved data from China which encouraged more risk to be undertaken in the markets. US equities have also hit a 2009 high and gold has gone back above $1000.00/oz heaping more pressure on the beleaguered dollar. The US treasury emissary in Beijing aptly named David Dollar added more pressure by stating that “China has a huge amount of foreign reserves and it makes a lot of sense for it to diversify” adding “I think it is healthy to have a variety of different reserve-type currencies. We welcome the internationalization of the renmimbi.” Economic data also did not help as the US trade deficit widened in July.

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The Monetary Policy Committee of the Bank Of England today announce their monthly interest rate decision. As we stand it is not expected that interest rates will be cut or that any extension of the Quantitative Easing programme will take place; however last month the market was jolted into life with the shock announcement that QE was expanded by £50 billion and therefore we cannot rule out further expansion today. The market is reflective of this and sterling has fallen back a little against the USD to the low 1.65’s and as low as 1.1320 against the euro; if we do see a further expansion of QE expect more selling of the pound. If you were a market speculator you would be brave to bet against further action from the BoE although no action is expected…

In other news the Reserve Bank Of New Zealand left interest rates unchanged at 2.5% as expected, they cited that further rate cuts remain possible but rates will eventually rise when economic recovery is entrenched. The bank also mentioned that the high value of the NZD is threatening to undermine the economic recovery of New Zealand; similar concerns hold true in Canada, Australia and Japan. You may have noticed that the UK government and the Bank Of England have not exactly supported the pound with their bearish comments through the economic crisis and although caution has been warranted it has also become beneficial for the UK’s economic recovery via a weaker pound.

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That is according to the NIESR (National Institute for Social and Economic Research) who yesterday heralded that the in the three months to August the UK economy grew by 0.2%. This news was followed with consumer confidence data improving and follows yesterdays improved numbers in Industrial output and Manufacturing output. However this morning the pound has already lost ground against the USD and the EUR as the threat of further surprise action in tomorrows Bank of England is weighing on the pound. According to sentiment the BoE should not move on QE, however this cannot be ruled out with the bearish tone of the Monetary Policy Committee. If we do see a further expansion of QE then we will see further weakness in the pound.

The big news yesterday was the sell off in the USD which was across the markets and relentless; the dollar index hit a fresh low as a culmination of facets undermined the USD. The continued boost in equities and the rally in gold is one reason for the USD weakness; in addition the continued call for a new reserve currency most recently by the UN and the concern over the huge deficit in the US. The ECB did back up the USD yesterday by stating that it would be very unlikely for the euro to replace the USD as a reserve currency- notably the USD recovered a touch on this.
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Gold and commodities continue to outperform in the markets helping lift the ZAR, AUD and CAD. In particular the AUD is the star performer hitting yearly highs against the USD and new highs against sterling. Sterling had a mixed day against the majors initially pushing higher against the USD and EUR before losing ground in later trading. Today UK industrial production is due for release and in the light of the recent drop in manufacturing PMI it could disappoint. News out already from the UK showed that like-for-like retail sales fell 0.1% in August year on year, however overall retail sales increased 2.2%.

As I am writing the USD has lost across the board- sterling is pushing towards 1.65 and EUR/USD 1.4450; sterling not quite pushing through 1.65 as we await the UK data. So what is causing the USD weakness? Personally I feel it is a culmination of factors- we have the increased appetite for risk and recent improvements in economic data helping the risk appetite trade. Also the G20 have given the markets comfort by stating that stimulus will not be removed anytime soon until recovery is assured; another reason is that the markets may be looking at the huge deficit for the US and with recent chatter from the UN that a global reserve currency is required also undermining confidence in the USD.
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Sterling started on a weak note at the beginning of last week as concerns grew over the effectiveness of Quantitative Easing. With the Bank Of England raising the amount of QE last month by another £50 billion there has still been little real effect in the lending patterns of UK banks which is concerning. Aside from this the spiraling public debt levels and confirmation from the OECD (The Organisation for Economic Cooperation and Development) that the UK will lag other major economies in a recovery was all weighing on sterling. However we did see gains in sterling come back into play on Thursday and Friday- can this continue?

This week we should see lots of price action in sterling with Industrial Production, producer prices and RICS house price balance. The main event this week will be the interest meeting from the Bank Of England; it is not expected that rates will move even in the light of a call for another cut! However the tone of the Bank Of England will be scrutinized for future action in relation to further QE.
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