Currency Update

The US Dollar has continued to appreciate following last night’s unexpected announcement by the Federal Reserve to increase its Discount Rate by 0.25% to 0.75%. The Discount Rate is the rate US banks are charged at to borrow emergency funding from the Federal Reserve. The Target Rate that banks usually borrow at remains on hold at 0-0.25%. The move whilst largely symbolic, confirms that the Fed is starting to realise its exit strategy towards a return to more ‘traditional’ monetary policy. However, it is expected that the Fed may not tighten official monetary policy until the autumn.  Nonetheless, the US Dollar has appreciated strongly, pushing GBPUSD below 1.54, whilst EURUSD trades around 1.35 on the interbank market.

In the UK, the Pound took a fresh blow following this morning’s disappointing retail sales and yesterday’s public sector net borrowing figures, which showed that the UK government had to borrow £4.3B in January, a month which usually posts a surplus. UK tax receipts dropped by 11.8% compared with January last year. 

The debate also continues regarding the suitable timing of any UK government spending cuts. In an open letter to the Financial Times more than 60 senior economists backed Chancellor Alistair Darling’s decision to delay any government spending cuts until 2011, fearing that any earlier cuts could force the UK back into recession. This was as a direct riposte to a letter sent last weekend to The Sunday Times by a group of 20 leading economists supporting the argument that more rapid action to tackle Britain’s deficit was needed and that fiscal tightening should start this year.

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Currency News

Last week the currency markets were firmly focused on the Euro with the fiscal problems of Greece and also Spain and Portugal taking the headlines. Speculation built throughout the week that the other European Monetary Union states, led by Germany, would come to Greece’s aid. However, markets were clearly disappointed that whilst a rescue package was agreed in principle, European leaders failed to set out a comprehensive package.

The Euro was also pressured following the release of disappointing Eurozone GDP data. Total Eurozone 4th quarter 2009 GDP expanded by a mere 0.1%, the market had been expecting growth of 0.3%. Noticeably, German GDP (the largest European economy) failed to expand at all, whilst Italian GDP slipped back into contraction. Spain, hit by a housing market collapse and official unemployment greater than 20% remained in recession.

As a result, the single currency fell to a low of 1.3531 against the US Dollar, its lowest level since May 2009. The US Dollar, viewed as a safe haven, appreciated across the board as investors took flight from risk as stocks and gold prices tumbled. The Pound fell to 1.5534 against the US Dollar but rose past 1.15 against the Euro.

 In the UK the Bank of England released its Quarterly Inflation Report. The report was markedly pessimistic about the UK economy, revising its growth forecasts down. UK Interest rates are expected to stay low for a protracted period of time as growth remains weak and inflation is expected to fall back below the 2% target after initially spiking higher to 3%. Moreover, the Bank of England failed to rule out the possibility of extending its asset purchase scheme know as Quantitative Easing. Consequently, the Pound is expected to stay weak for some time. However, some gains could be made against the Euro, depending on how the Greek bailout develops. Sterling’s 25% depreciation should eventually help the UK economy grow as our exports become more competitive.

 Elsewhere, the Australian Dollar rallied following better than expected employment data with GBPAUD falling to 1.76. In China concerns over potential asset bubbles, led officials to order banks to increase their levels of reserves in a bid to cool the amount of lending.

Currency Update

Risk Aversion returns, USD and JPY higher.

The market this week has seen a fresh bout of risk aversion causing stock prices and gold to tumble. As a result both the USD and JPY have appreciated considerably.

GBPUSD has fallen to its lowest levels since May 2009, falling earlier to a low of 1.5655. Some analysts now expect that the Pound will continue to slide against the USD possibly to 1.54 and from there GBPUSD could re-visit the nasty lows of 12 months ago, where GBPUSD traded between 1.3514 and 1.4986 between Jan-Feb 2009. On the other hand, if we see some more positive news we could see GBP rebound past 1.58. However, at the moment it seems that any potential upside should be limited below interbank 1.6070.

In the Eurozone we have seen renewed concerns regarding a number of member’s budget deficits.  As a result EURUSD has fallen markedly, hitting a low earlier today of 1.3649. Moreover, EURUSD weakness is spilling over into other crosses and could force the Euro lower against a number of other currencies, including Sterling.

This afternoon at 13:30 we see the release of US Non-Farm payrolls, a major event on the economic calendar. If these numbers disappoint risk aversion could be strengthened further and you would expect both the USD and JPY to benefit from this.

Currency Matters can offer a number of products and strategies which help you manage your currency risk. Please contact the dealing team on +44 (0) 1695 581 669 for more information.