Blow to risk appetite
Whether we are heading towards the light or likely to be plunged further into darkness remains a source of contention at the moment. Accountants have predicted 2009 will be the worst year since WW2 for the UK, but retail sales more than doubled in June. Equity markets have experienced their longest rally in two years, but this was snapped by a downbeat assessment of the US economy. This varied mix of economic data is painting a messy picture, though it seems that tentative signs of recovery are emerging from an unstable base. This is leading to predominantly risk based trading, which is determining exchange rates for the major currencies.
Sterling exchange rates have travelled the length of their recent range against the US dollar this week, touching on 1.62 after the release of whopping government debt figures and rising to 1.66 following positive retail sales. Bank of England governor Charles Bean noted that the weak pound is aiding a UK recovery, with lower prices stimulating the export sector. While this tends to suggest sterling's decline is a carefully orchestrated ploy rather than the result of fiscal mismanagement, if it helps to get the UK economy on track, the Bank might just get away with it.
Minutes from the MPC meeting showed the committee unanimously voted to keep QE levels unchanged in July, deciding that further stimulus was not necessary. Government debt has risen to 56% of GDP, raising concerns that this could prove inflationary in future. New industrial orders dropped to their lowest level in 17 years and the CBI voiced concerns that manufacturing sector could suffer job losses in excess of 250,000 as a result.
US markets have been firmly fixed on one man this week: Ben Bernanke. As chairman of the Federal Reserve, Bernanke not only presided over the economy in the years up to the financial crisis, but is the chief architect of the bail out package. Bernanke gave a cautious assessment of the US economy this week, stating that while there are "tentative signs of recovery" the economy remains fragile and the Fed has no plans to tighten monetary policy soon. This fuelled risk aversion internationally, sending US dollar and yen exchange rates higher at the expense of the pound, euro, Australian and New Zealand currencies.
The eurozone has been relatively quiet this week with the euro occupying a mid-range between the safe haven and higher yielding currencies. The euro climbed to 1.42 against the greenback and has remained there, boosted by the corporate earnings led market rally. Credit Suisse is the latest bank to report a profit, posting a 29% surplus due to profits in trading and investment.
Polish zloty has climbed to a three-month high against the euro, led higher by the rally in Western Europe. Recession in Western Europe has hammered Polish exports and a recovery in the region would help stimulate Polish economy. The Australian and Kiwi dollars have also experienced high volatility this week, with exchange rates surging to multi-month highs and lows on the back of risk trading.
I'm afraid this week the advice remains the same: if you need to transfer currency, use a currency specialist. At Currency Solutions we provide you with personal currency brokers who will monitor exchange rates on your behalf and phone you at the best time to trade. This can help eliminate exchange rate volatility, and give you excellent exchange rates for currency transfer. To see how much you could save, send us an enquiry today.
Have a good weekend.