Desperate Times, Desperate Measures
Reports of a Dollar bill found on the floor of the US Stock Exchange sent Wall Street into a frenzy this week. Described as ‘crinkled but real' by theonion.com, the Dollar was discovered in the northwest corner of the building, giving new meaning to the term single currency.
Not really. But governments and central banks around the world have been reaching deep into their pockets to spread a little cheer. The week has been painful for pound watchers, as last week's hard won gains were wiped in the blink of an eye and economic dark clouds loom over the festive season. Let's hope the Christmas party provides something to laugh at!
This week has been laden with important economic data resulting in major pressure for currency markets and Sterling in particular. After fighting hard last week to break through the 1.2 and 1.5 levels versus the Euro and US Dollar, the Pound plunged back through both this week, reaching a 6 year low against the Dollar and an historic low of 1.14 against the Euro.
Central banks have again taken centre stage with interest rate cuts in the UK and Europe as well as Australia, New Zealand and Sweden. The barrage of economic data this week has indicated rising unemployment while business, retail and consumer confidence continue to suffer. In the midst of such bleak economic outlook, market trends have remained negative and there seems little to cheer about at the moment.
To quickly recap, in the UK the Bank of England slashed interest rates by 1% yesterday taking the base interest rate to 2%, the lowest level since 1951. The decision was widely expected by markets amidst the deteriorating economic conditions although this didn't stop Sterling sinking to record lows against the Euro in the wake of the announcement. The Bank's accompanying report sited weak survey data and low business confidence as the reason for the 1% reduction and has urged banks to act quickly in passing these savings onto consumers.
Also in the UK, the Purchasing Manager Supply Indices for the construction, service and manufacturing sectors were released, showing record contractions for the month of November. This news is particularly worrying in the case of the service and manufacturing sector, which account for 50% and 18% of UK GDP respectively. With government spending accounting for the remaining 25%, this is a large economic burden for the government to shoulder at present. All signs point to a deepening of the economic downturn, with high likelihood of further interest rate cuts in January and February 2009 capping the value of the Pound at present.
In the US, equity markets have struggled to maintain the gains made last week as the credit crunch continued to claim more casualties. The National Bureau of Economic Research announced the US economy has been in recession since December 2007 leading global equities lower as the US accounts for 25% of the global economy. US unemployment figures are due today and a 0.3% rise, from 6.5% to 6.8% is widely expected. As the unemployment rate is strongly correlated with consumer confidence and business sentiment, this will undoubtedly have an affect on global markets and will influence the Fed's interest rate decision this month. Bernanke and Paulson have indicated it is ‘certainly feasible' we could see zero interest in the US.
The ECB also cut interest rates yesterday, by 0.75% amidst growing evidence of economic downturn. Retail sales fell by 2.1%, ahead of the expected 1.4% decline and the price of oil continues to plunge below $44 a barrel fuelling a decline in inflation rates around the world. As interest rates are approaching zero, Trichet is coming under increasing pressure to create a contingency plan against deflation for the European economies.
This week we have seen that after several false starts, markets are yet to gain any sustained upward momentum. Economists continue to revise growth predictions, delaying their starting point to further and further into 2009. Deepening recession is severely depressing currency rates and we are seeing historic lows and downward trends replacing some of the recent shock-induced volatility. That said, volatility is still an issue as Sterling has declined over 10 cents versus the Dollar in the last week!
The simple and most effective way of protect yourself from currency risk is to engage the expertise of a specialist. The low value of the Pound at the moment is providing good opportunities for those buying Sterling. Speak to your dealer about the best way to negate your currency risk and make the most from your investment.
Have a good weekend!