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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

Sterling has continued its recent climb following yesterday’s comments from Bank of England Monetary Policy Committee member Andrew Sentance, hinting that the Bank’s programme of Quantitative Easing may be put on hold.

Later today we eagerly await the European Central Bank interest rate decision at 12:45 and press conference at 13:30.

On the interbank market Cable (GBPUSD) has pushed through 1.6230 and currently trades at 1.6265, whilst the Pound is also trading above 1.12 against the Euro. EURUSD is currently trading just below 1.45 at 1.4493.

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Currency Update

The currency markets have started the week in a relatively tight range, however it is possible we could see some volatility as any moves in the market could be exaggerated due to thin market conditions. Levels of trading will likely decrease further as we near Christmas.

Major data this week includes UK and US GDP tomorrow, Bank of England minutes on Wednesday and US jobless claims on Thursday.

 EURUSD is currently trading at 1.4359, GBPUSD @ 1.6130 and GBPEUR @ 1.1228.

 Wishing you a Merry Christmas and a happy New Year!

Bank of England

The Bank of England has revealed today that it secretly lent RBS and HBOS a total of £62 billion in the form of Emergency Liquidity Assistance at the height of the credit crisis following the collapse of Lehman Brothers in the Autumn of 2008.

The Bank of England acts as the “lender of last resort” to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole.

The Bank of England added “In most cases, confidence can best be sustained if the Bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance.”

It is now viewed that since RBS has signed up to the government’s Asset Protection Scheme and Lloyds Banking Group which took over HBOS has embarked on an alternative strategy to raise further capital in a large rights issue “the Bank judges that there is no longer a need for the assistance to remain secret.”

In further comments to the Treasury Select Committee, Mervyn King the governor of the Bank of England has also stressed the need for the government to eliminate the structural budget deficit over the next parliament. Regarding monetary policy, Mervyn King said that over a period of two to three years the Bank of England would expect to tighten monetary policy by both hiking interest rates and selling some of the assets it had purchased under its Quantitative Easing programme. King argued that it’s hard to see how monetary policy could be more stimulatory, however noted that the Monetary Policy Committee would take any action it thought necessary to achieve the 2% inflation target in the medium term.

Taking into account a range of risks, Mervyn King currently expects that the UK economy will grow by 1.5% in 2010 and 3.0% in 2011.

King yet again took the opportunity to reiterate his support for a weak Pound, which should boost UK exports and help rebalance the UK economy.

Currency Update

The US Dollar remains under pressure as gold soars past $1,130 an ounce. EURUSD climbed as high as 1.4993 and has now settled around 1.4970. The Pound has also had a good day against the US Dollar hitting an interbank high of 1.6780 so far. The markets will now be eyeing Fed Chairman Ben Bernanke’s speech due later today at 17:15.

Over the weekend GDP figures released from Japan smashed market expectations posting third quarter growth at 4.8%. Of course this can largely be attributed to the massive government stimulus package so it is unlikely that these levels of growth will be sustainable.

Sterling will face a number of tests this week as the Bank of England’s Quantitative Easing Programme will take the limelight again. UK inflation data is due tomorrow (17/11) morning at 09:30 whilst the Bank of England Minutes from November’s Monetary Policy Committee (MPC) meeting will be released at 09:30 on Wednesday 18th November.

Currency Update

Risk appetite has returned to the market today as the latest GDP figures from the US suggest that the US is out of recession. The US GDP figures released earlier today beat market expectations with an annualised rate of 3.5% vs 3.2% expected. Whilst these figures are positive it remains to be seen how sustainable these levels of growth are, especially after the massive government stimulus has finished working itself through the economy.

The following improvement in confidence has led to safe haven currencies such as the USD and JPY coming under downward pressure.

Sterling has advanced through Interbank GBPUSD 1.65 and through Interbank GBPEUR 1.1100.

Expect plenty of volatility as we enter November as sentiment remains fickle. Both the Bank of England and the European Central Bank meet on November 5th. Analysts will be especially keen to see if the Bank of England extends its Quantitative Easing program and if so by how much. Some economists suggest that we could see an extension by as much as £50B but the consensus seems to suggest an extension of £25B is the most likely outcome.

Currency Matters can offer a number of products and strategies which help you manage your currency risk. Please contact the dealing team for more information.

Sterling spikes lower on comments from Mervyn King…

The Bank of England is considering a reduction in the deposit rate to discourage banks from hoarding reserves. The Bank of England is of the opinion that such a move could help spread the benefits of quantitative easing to the broader economy. However, Mr King has noted that a similar move by Sweden’s Central Bank the Riksbank has only made a minimal impact.

Mr King stated that there were signs that the UK economy started to grow this quarter but the strength of the recovery is highly uncertain. He noted that the £175B policy of purchasing bonds known as quantitative easing was beginning to impact nominal spending and money supply but there is still a long way to go to get output back to previous levels, whilst risks to inflation remain on the downside.

Such comments make Sterling less attractive as global investors seek higher yields.

As mentioned previously, the future outlook for Sterling remains highly uncertain. The Pound should recover as the UK economy recovers from recession but the timing and strength of such a recovery is still unclear. With Germany, France and Japan already out of recession, confirmation that the UK economy is expanding again is vital to a recovery in Sterling. The market will also need to have some confidence that the UK will not slip back into recession, particularly as the government stimulus ends.

If Sterling interest rate differentials remain negative or even widen further then there is a risk that Sterling will remain weak for some time.