Foreihn exchange report
News Article Date: Tuesday 27th of October 2009
Last week saw a very turbulent week, with Sterling starting at a low 1.0880 against the Euro, and strengthening to just over the 1.11 mark in the early part of the week, as Bank of England minutes on Wednesday morning showed unanimous support for a halt in the Quantitative Easing programme upon signs the economy was beginning to recover. Sadly, this strength was to be short lived as GDP figures on Friday unexpectedly showed that the UK was still in recession for the third quarter. Upon this release, Sterling dropped a cent against the Euro in seconds, then a further drop down to 1.0810 as the day went on. This news was a huge blow to the UK economy, as almost all analysts had been predicting that the UK would see a return to growth in line with the rest of the world. If the US shows positive GDP figures this week as expected, then it is likely that the United Kingdom will be the last of the major world economies to exit recession, which is likely to have catastrophic consequences for the pound.
Prime Minister Gordon Brown announced over the weekend that the UK would see a return to positive economic growth by the end of the year, although he offered no justification for his comments other than confidence in the future success of government fiscal policy.
Data releases on the continent were on the quiet side last week, with Sterling strength, then sudden weakness being the driving factor behind the GBP/EUR cross, and this is likely to remain similar for the week ahead, with housing data from the UK on Monday, and inflation data from the Eurozone on Friday the only noteworthy releases, and neither likely to have a significant effect on the market. More likely to affect the market are speeches by key policymakers such as central bank Governors Mervyn King or Jean-Claude Trichet as well as government finance ministers from the UK and Europe. Unfortunately, the markets get very little notice of such announcements, and thus they react sharply to any comments as and when they appear.
In order to take advantage of these spikes, and protect yourself from the falls, speak to your Account Manager about Forward Contracts, and Limit and Stop Loss orders, all of which can help maximise your returns.
The Pound started and ended the week in virtually the same place against the Dollar after anticipation of favourable GDP figures failed to result.
Sterling fell sharply against the Dollar on Friday after figures showed that the UK economy is still in recession. An advanced estimate of third-quarter Gross Domestic Product showed that the economy contracted by 0.4%, a sixth consecutive quarterly decline marking us in the longest slump since records began.
The market had been expecting positive news, especially after Wednesday’s MPC minutes showed a 9-0 vote to keep rates on hold and Cable had been making good progress reaching interbank highs of 1.67. However the disappointing figures triggered a huge Sterling sell off on Friday and into this week - Furthermore the data adds weight to the argument that the Bank of England should extend Quantitative Easing measures at its next policy meeting on 5th November.
This is a bitter blow for those Dollar purchasers who have been waiting eagerly for the 1.70 level. However those purchasers who took advantage of using a Stop Loss order after the gains earlier in the week will have minimized their losses against this recent current fluctuation.
Whilst the US Dollar's weakness has been somewhat less visible against Sterling due to huge Sterling weakness, the currency’s relative underperformance in a global context was clear last week as the Euro's value rose above 1.5 US Dollars for the first time in fourteen months.
The Dollar generally began to weaken off last week against a basket of currencies as investor appetite started to grow. As a result investor’s started to pull funds from the Dollar which have been seen as a safe haven currency and moved into riskier assets. Federal committee Policy members however remained cautious, indicating that growth in 2010 would be slow. Despite these comments ‘New Homes Sales’ were still recorded as their highest monthly rise since 1999.
This week it is the turn of the US for their third-quarter preliminary estimate of GDP on Thursday. The expectation is that we will see the US returning to growth and if so we will probably see further downward pressure on Sterling, but given the upset in the UK last week the markets will be watching with interest.
For those looking at buying Dollars the cautious move would be to purchase early in the week before the results are posted. However, for those who wish to test the market a little and wait for the GDP announcement to happen, make sure you speak to you FCG Account Manager to discuss placing a Stop Loss Order and a Limit Order to protect yourself against losses if the markets fall and capitalise on your position should the market spike.
Sterling climbed against the Australian Dollar over the middle part of last week, trading above the 1.80 level, only to fall on Friday due to lower than expected GDP figures. The Pound's initial gains came as a result of Wednesday’s decision not to add to quantitative easing by the Bank of England, despite strong commodity prices and a record annual growth in Chinese GDP (a major Australian trading partner). Having raised interest rates to 3.25% at its recent policy meeting, the Reserve Bank of Australia’s minutes noted that economic growth is expected to return to trend in 2010, fueling speculation that interest rates will continue to rise throughout the year.
GDP/AUD closed at 1.7671, down 0.96% from 1.7842 a week earlier, showing further improvements for those selling Australian Dollars this week and indicating to those looking to do so in the future that it may be beneficial to take advantage of today’s rates and discuss the possibility of a forward contract with their Account Executive.
Finally, this week sees the release of consumer price inflation data on Wednesday. A threat of further rises in inflation is likely to make the case for further increases in interest rates. Ultimately, any further rise in interest rates will lead to a strengthening in the Australian currency and a fall in exchange rates. This simply highlights that it may be advisable for those looking to buy Australian Dollars to do so before rates fall further.
GBP/NZD traded above the 2.20 level at both the early and late stages of last week, lacking general direction, with only slight market movement upon Friday’s GDP release, causing Sterling weakness and lows under the 2.17 level.
Last week saw an absence of major economic data releases from New Zealand with only indications of strong commodity prices and robust Chinese growth data (a major trading partner) underpinning support for the NZD, speculating that interest rates could rise sooner than expected.
GBP/NZD closed at 2.1604, down 2.16% from the previous week, benefiting those looking to convert New Zealand Dollars into Sterling.
The Reserve Bank of New Zealand will announce its interest rate decision on Wednesday. Despite a widely expected no-change announcement, there is likelihood that this will cause speculation that any further rises would be likely within the first, rather than the second half of 2010. In conclusion this should highlight to those buying the New Zealand Dollar that whatever Wednesday’s decision the currency looks set to strengthen and rates to fall further.
This Weeks Data
Last week demonstrated how data releases can dramatically affect exchange rates, and cause your currency purchase to be much more expensive than necessary. The better than expected Retail Sales Data caused the pound to rise, along with a bullish view of UK recovery by the Bank of England. Last week also showed how short lived spikes like this can be, with the poor GDP figures on Friday causing Sterling to fall across the board.
This week for the UK we have various house price measures that will indicate current movements in the housing market, and that is considered as a sensitive factor to the UK's economy so can affect the value of the pound.
For the EU, we have unemployment data on Friday, which is a leading indicator for the European Economy. If the rate is up, it indicates a lack of expansion within the European labour market. As a result, a rise leads to weaken the European economy and thus the Euro. There is also Consumer Sentiment & Business Climate data from Europe.
From the United States, Thursday sees Gross Domestic Product & Personal Consumption data.
Elsewhere we have Business Confidence and an interest rate decision for New Zealand. There is an interest rate decision in Japan, and Consumer Price Index from Australia.
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