G20 meet to discuss EU debt crisis

Friday 14th October 2011
Good morning. Despite Trade Balance figures for the UK being better than expected, Sterling fell against the US Dollar as both the Pound and the Euro weakened after the European Central Bank said that the sovereign debt crisis could damage the euro’s reputation. I would have thought that obvious, but there was still market reaction to the statement. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1443
• GBP/USD 1.5759
• GBP/AUD 1.5452
• GBP/NZD 1.9828
• GBP/CHF 1.4152
• GBP/CAD 1.6073
• GBP/ZAR 12.368
• GBP/JPY 121.21
• GBP/DKK 8.5169
• GBP/NOK 8.8737
• EUR/USD 1.3771

UK Trade Balance better than expected

The UK’s trade deficit narrowed in August official figures have shown. Analysts said the stronger exports may boost the economic growth figures, however there were limited gains for Sterling on the news.

Howard Archer, chief UK economist at IHS Global Insight, said the August figures were “appreciably better than expected”. The latest trade figures come a week after the Bank of England announced that it would inject a further £75bn of new money into the UK economy through another round of quantitative easing.

G20 Finance ministers to meet over Eurozone

Finance ministers from the G20 group of nations are meeting France later today to continue efforts to find a solution to the EU debt crisis. Greece remains the focal point but there are also fears that the crisis could spread to other countries such as Spain and Italy. This comes a day after the ECB warned that the Euro’s reputation is at risk due to the debt crisis.

This weakened the single currency a little pushing GBP/EUR rates up, but as the UK is also exposed to the debt problems, gains were limited and today rates remain in the mid €1.14’s.

Other news yesterday from the Eurozone was that Spain has had it’s credit rating cut. Standard & Poor’s reduced Spain’s long term rating by one point saying there was weak growth and high levels debt. This is only one week after rating agency Fitch also cut Spain’s rating.

There were other downgrades yesterday of the creditworthiness of UK banks Lloyds and RBS, and also UBS. This shows that there are real concerns both over the health of UK and EU banks. The markets have reacted very little however, probably as there have been so many downgrades all over the world, it’s the same for everyone and so there has been no real effect on exchange rates.

Sterling vs Australian Dollar

The Pound had been making some gains against AUD in recent weeks. Antipodean currencies tend to weaken when there is global economic uncertainty, as they are perceived as risky. When there is volatility investors tend to unwind Carry trades and return to the safe haven currency, weakening AUD.

As some risk has returned to the markets following better US Data, we have seen GBP/AUD slip back slightly of late however. Generally Australia largely avoided the recession, and it’s higher interest rates have been keeping it strong and exchange rates low relative to where they have been in recent years. If we see an interest rate cut in Australia in the coming months then we could see the rate increase more, but while there is so much turmoil in the markets investors will remain wary of the AUD.

Today’s Data

Lots of EU data today. Trade Balance figures from the EU are released at 10am, followed by various measures of inflation. In the US, retail sales will show how confident consumers are in the economy.

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