Foreign Currency Report 02 September 2008
GBP
The Pound traded at the lowest level since 2006 versus the US Dollar and actually hit all time lows versus the Euro in trading yesterday and the same trend has continued so far today. This came after figures showed that UK mortgage approvals dropped to the lowest since at least 1999 and manufacturing contracted for a fourth month adding to evidence of a looming recession.
Banks granted 33,000 loans for house purchases in July, the fewest since comparable data began nine years ago, the Bank of England said in London yesterday. An index based on a survey of factories by the Chartered Institute of Purchasing and Supply stayed below 50 in August, indicating contraction.
The sell off in Sterling was also down to comments made at the weekend by the Chancellor of the Exchequer Alistair Darling. Mr Darling told The Guardian that economic conditions were “arguably the worst they've been in 60 years”. The comment was in stark contrast to Gordon Brown's insistence that the UK economy remains resilient. Darling’s comments have been ridiculed by his colleagues and the press who state that he is talking Britain into a recession. This all coming from the Chancellor of the Exchequer who usually talks up the economy!
Prime Minister Gordon Brown will announce measures this week to help first time buyers and people facing the risk of repossession as the Bank of England battles the fastest inflation in more than a decade, which may prevent it from cutting the main interest rate on Thursday. Sterling is now the worst performing of the 10 leading currencies this year having fallen over 9% versus the Euro and over 12% versus the Dollar.
EUR
The European Central Bank will probably keep interest rates at a seven-year high this week, and may even threaten to raise them, at the risk of prolonging the economic slump.
All but one of 47 economists surveyed by Bloomberg News predict the Frankfurt-based central bank will leave the benchmark rate at 4.25% on Thursday and only five expect a cut this year, even after the region's economy contracted in the second quarter.
Policy makers Axel Weber and Lucas Papademos said last week the ECB remains focused on inflation risks and may need to lift rates again if they intensify. Executive Board members Lorenzo Bini Smaghi and Juergen Stark also stepped up their inflation- fighting rhetoric, just days before they meet to decide on rates.
This is not good news for all those clients looking to sell Sterling and buy Euros as it acts as a double whammy pushing the value of the Pound lower! All eyes will be on Thursday’s ECB meeting and the press conference that follows to gage what may be in store for the Euro in the coming months.
USD
So Hurricane Gustav was downgraded to a category 2 event yesterday and forecasts of the amount of damage it will cause was said to be unlikely to reach $10 billion (in comparison to Katrina which caused $68.5 billion). On the back of this, oil prices dropped off to a near 4 month low and there is now speculation that this drop in price pressures will support economic growth in the US. Oil is becoming an increasingly important factor for the Dollar, as it falls in price it means lower energy costs for US manufacturers and increased purchasing power for US consumers. These factors of course help to strengthen the economy which allows the Dollar as a currency to strengthen too. You may or may not be aware that there is speculation in the market that the Dollar advance versus the Euro and the Pound will continue with $1.40 versus the Euro and $1.50 versus the pound headed up as potential levels on the downside! We have seen the Dollar gain over 10% versus the pound in the last 6 weeks and there is nothing to suggest that things will not continue in this trend. There is a lot of economic data released throughout this week including ISM manufacturing today, mortgage applications tomorrow and non farm payroll figures released on Friday so keep your hats on as we are in for a rollercoaster week!
Other News
Australia's central bank cut its benchmark interest rate for the first time in seven years amid signs the nation's economy is slowing. Governor Glenn Stevens and his board reduced the overnight cash rate target by a quarter point to 7% in Sydney this morning, as the market expected. The biggest slump in retail sales in six years, a slide in business confidence and concern about the global credit squeeze meant “there was now scope for monetary policy to become less restrictive,” Stevens said. The Australian currency has weakened off a small bit after the announcement but this news was expected and therefore it had already been priced into the market prior to the announcements.
So with further weak data from the UK economy and downbeat remarks from government officials it should come as no surprise to see the Sterling exchange rate drop off further and I for one believe that things will get worse in the short to mid term. If you have any requirements to buy Euros or US Dollars then you should certainly look to act sooner rather than later before things get worse! Expect the huge amounts of volatility we are seeing in the foreign exchange markets to continue so speak to one of our experienced currency brokers and we will be sure to help you reduce the amount of risk exposure your currency exchange purchase is open to.
If you want to discuss any of the above, the currency exchange services we can offer and how we can tailor our approach to meet your personal requirements, please feel free to call on +44 (0) 20 7989 0000 or email djw@fcexchange.co.uk and ask for Daniel.
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