Not even so much as a virus?
Ouch Fergie. The credit crunch is hitting all sectors this week and it seems no one is immune from a good drubbing. Even the President, yes he still is President, had to duck from the ‘Baghdad Clobber' this week as frustration got the better of him and sent shoes flying towards Bush's head.
This week has been another extreme one for markets with shocks showing no signs of abating just because we are all winding down for the year. For Sterling, this has been one of the worst on record as severely weak data and mounting expectations of further interest rate cuts channel the Pound on a course for parity with the Euro. To cap off what has been an annus horribulus for banks comes the unravelling of the biggest banking fraud in history at the hands of one Bernie Madoff and his 3 man team of accountants. Bring on 2009!
Important data has been coming thick and fast this week sending currencies to the outer limits of their ranges and beyond. Both the US and Japan have slashed interest rates, to 0.25% and 0.1% respectively in a case of one-downmanship as they attempt to devalue their currencies and stimulate export industries. Sterling has plunged to ever-decreasing lows against the Euro and remains on course for parity, while the Australian and New Zealand Dollars have surged to nearly 3 month highs on the back of widening interest rate differentials.
Having limped towards new low against the Euro this week, the battered Pound is still searching for a bottom. Bouncing from 1.04 yesterday, Sterling is back up to 1.06 this morning although weak labour markets and the high likelihood of further interest rate reductions continue to pile on the pressure. Drastic rate reductions from the Bank of England have inverted the ‘normal' Sterling/Euro relationship as higher yields are now to be found in the Eurozone and this is undermining the value of Sterling.
In the UK this week unemployment has risen to 1.86 million in November taking the official unemployment rate up 0.2% to 6%. David Blanchflower, labour market expert at the MPC, has predicted unemployment could top 3 million in the course of the recession. Labour market statistics remain crucial to the value of Sterling as employment is a key factor in consumer and business confidence.
The MPC minutes revealed a 9-0 vote to reduce the base rate by 1% with greater cuts considered by the Committee. This news was interpreted by markets as an indication of further rate cuts to come which sent Sterling plunging against the Euro. Inflation figures showed a decline from 4.5% in October to 4.1% in November, after peaking at 5.2% in September. Inflation is expected to continue declining as a result of lower energy prices, interest rates and heavy discounting from retailers. The Bank of England's inflation letter announced rates could move ‘materially' below the official target of 2% in the second half of 2009 and Charles Bean, deputy Governor of the Bank stated interest rates could fall to zero. On the upside, retail sales figures grew 0.3% on last month and the GFK consumer confidence survey showed an upturn in sentiment in recent weeks. There is also evidence that the weak Pound is providing support for the manufacturing and export sectors.
The US base rate reduction to 0.25% confirmed the new standard for decisive market action and the Japanese Central Bank followed with a 0.2% reduction, taking their interest rates to 0.1%. This fuelled a surge in demand for Australian and Kiwi Dollars as interest rate differentials make higher yields more attractive, yet failed to dampen the attraction of the Yen. The effects of OPEC production cuts were mitigated by uncertainty over growth prospects as China and Japan both revised 2009 growth prospects downwards to 5% and 0% respectively.
The Euro has continued in its bullish run, regarded as the ‘darling' of currency markets at present. While market focus is on negative data from the US and UK, the Euro is benefiting from collective stability and a lack of sharp rate reductions by the ECB. Although the Euro is regarded by economists as somewhat overbought, we can expect this strength to continue while interest rate cuts and negative employment data dominate headlines in the UK.
What is certain at present is that the beleaguered Pound is providing unprecedented opportunity for Euro/Sterling exchange. We are also approaching the end of year in which a general period of consolidation occurs so we may see some volatility over the next week or two. Your dealer can provide you with expert advice on market movements and advise you on what this means for your currency requirements.
Have a good weekend!