Foreign Currency Exchange Report 19 March 2010

Currency markets at present are increasingly influenced by the mishaps of politics, rather than the more reflective and accurate influence of hard economic data. Obama has said it himself recently when speaking about increasing tensions with China over the manipulation of their currency for unfair trade. You only have to look as far as the Pound and the Euro to see how political uncertainty can affect a currency, with political upheaval being one of the biggest drivers in the modern market.

Sterling

Yesterday, the Pound exchange rate continued to reap the rewards of much better than expected unemployment figures released for the UK on Wednesday. Sterling was also buoyed by better than expected figures from the ONS. News that public sector net borrowing last month only grew by £12.4bn (way below the consensus of £14.8bn) caused Sterling to edge higher for the third day in a row, as the market took light that the UKs public finances were not as gloomy as analysts had forecast.

In many minds Sterling has outperformed as of late, however, the upside surprise in UK labour market data along with a unanimous decision from the BOE suggests rates and QE remain on hold which helped indicate the CPI was likely to remain on target for the coming months. Going forward, sentiment is certainly behind the Pound, with recent bets by traders proving testimony to this, as they extend their long positions on the currency. However, in what is still an incredibly volatile market, it would be a wise idea to pounce on any Sterling positivity whilst it exists, and with no major releases out of the UK today expect sentiment to dictate the market. Our public sector net borrowing may have come in below expectations. This is still double the amount borrowed in the equivalent month last year.

Euro

The stability of the Euro was again tested yesterday, as the unprecedented bad-boy of the Euro-zone. Greece threw down the gauntlet to its larger European neighbours. The Euro exchange rate depreciated against many major currencies, most notably the US Dollar as Greek Prime Minister Papandreou threw down a deadline of a week for the EU to produce some form of clarity on the Greek crisis. Papandreou threatened to turn to the IMF for a rescue plan for its truly battered economy if there is no response. Time is clearly running out for Greece, as a large amount of its debt begins to mature over the next few months. The lack of clarity is prompting continuous speculation that Greece will default on its debt.

In plain and simple terms, this presents a very genuine threat that the whole Euro-zone could come close to a major fall out which could ultimately cause the Euro exchange rate to devalue drastically. Going forward, with relatively little in the way of economic data being released, expect the market to continue to trade in line with further detail over Greece. Keep a watchful eye on (Ancient) Greece.

US Dollar

Across the pond, the Greenback as of late has been broadly weaker on the back of higher risk appetite prompting investors to sell dollars and buy higher yielding, riskier assets elsewhere. Global economic fundamentals are improving and the S&P and Nasdaq are closing in on fresh highs. The current rally in risk is also being supported by developments from central banks globally that will theoretically keep liquidity more available than not.

In spite of this the US Dollar exchange rate strengthened up marginally in yesterday's trading, as renewed jitters over Greece prompted strength from a renewed safe haven bid.

With anything but a barrage of data released today expect global confidence to dictate any price action. Traders are slowly beginning to bet against the US Dollar's demise (with long USD positions decreasing for a second week in a row) and if such renewed confidence is maintained or extended, the US Dollar could well come under additional pressure.

Please contact Foreign Currency Exchange on +44 (0) 20 7979 0000 to discuss your currency exchange requirements.