G20, Sterling vs US Dollar

Good Morning. With little UK data yesterday, the pound remained steady against the Euro, with hardly any movement. The pound crept up slightly against the USD, and fell against the Aussie Dollar and Kiwi Dollar. Rates as at 08:30am 22/09/09 are as follows:

  • GBP/EUR 1.1015
  • GBP/USD 1.6282
  • GBP/AUD 1.8606
  • GBP/NZD 2.2552
  • GBP/ZAR 12.057
  • GBP/CAD 1.7415
  • GBP/JPY 148.52
  • GBP/CHF 1.6680

Before we look at todays currency info, a quick link to a good article in the Telegraph about how to find the best Foreign Exchange Deals:

http://www.telegraph.co.uk/finance/personalfinance/offshorefinance/6205184/How-to-find-the-best-foreign-exchange-deals.html

The only UK data of note yesterday was from property website Rightmove showed asking prices for homes in England and Wales were on average 1.5 percent lower this month than a year ago, with the available stock at its lowest for 18 months.

Today is also very quiet in terms of UK data, with all eyes now on tomorrows Bank of England minutes, which are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. If the BoE is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the GBP.

G20
This week’s G20 summit in the US will call for major reforms to promote a more balanced global economy. A draft paper hints at significant policy changes from G20 countries, including the UK, the US and China. And while stimulus packages should continue for now, the document called for the creation of “transparent and credible” means to unwind that support. Leaders will meet in Pittsburgh with the economy high on the agenda.

NZ Dollar
For today, we have GDP data for New Zealand at the end of the day. It’s a measure of the total value of all goods and services produced by New Zealand. The GDP is considered as a broad measure of New Zealand economic activity and health. A rising trend has a positive effect on the NZD, while a falling trend is seen as negative (or bearish) for the NZD. We expect the figure to show a contraction of 0.2%.

Other data
Not much! Nothing for the UK, Retail Sales from Canada, House Prices and Manufacturing data for the US.

US Dollar
The US Dollar rose against Sterling last week, with the UK currency falling 2.4 per cent to $1.6280. However, this was caused by weakness in the UK economy, rather than the strength of the greenback. The dollar actually fell to one-year lows against the Euro and the Japanese Yen, as rising risk appetite stemmed safe-haven demand for the US currency. So the rise against the pound highlights just how negative the current outlook is for Sterling.

The Dollar’s fall against most major currencies displayed a willingness to take on more risk as stock markets rose, with investors selling the low-yielding currency to seek higher returns elsewhere. Some analysts feared a further decrease in the coming weeks as it appeared there was a risk that the low US interest rates could lead to the dollar replacing the Yen as the financing currency for the carry trade – where investors borrow in a country with low interest rates and then exchange the currency to buy assets in countries with currencies yielding higher returns.

However, these fears were eroded in early Monday morning trading, as the Dollar rose against major currencies, hitting $1.6143 per pound on speculation the US may start to reign back the economic stimulus measures of past months, showing signs of recovery and increasing demand for US assets.

Although it is believed interest rates will remain low for some time, Federal Reserve Chairman Ben Bernanke reported last week that the US recession has probably ended.

The main factors for the downward pressure on the pound came from Mervyn King’s comments that the Bank of England is considering lowering the interest rate it pays commercial banks for the deposits held in accounts at the Central Bank, added to the problems facing Lloyds TSB and whether it will need further assistance in the BoE’s asset protection scheme.

The difficulties facing British banks and the strategy of quantitative easing employed by the Central Bank has weighed heavily on the UK currency, whilst the £16.1 billion public sector budget deficit for August alone gave investors the impression that this weakness shows no immediate signs of abating.

The release of the September BoE minutes and the Fed’s interest rate decision on Wednesday, plus the G20 finance ministers meeting towards the end of the week, mean that there is likely to be some movement in the Sterling and Dollar markets.

Mentioning of further quantitative easing and the rate paid to commercial banks by the BoE will be watched closely, so contact us to discuss the possibility of tying into current rates through forward contracts, or setting up stop-loss orders to minimise exposure to any further Sterling losses.

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