Governments to the Rescue
Well, it's been a sobering week internationally with no shortage of drama on the scene. Terrorist attacks in Mumbai suspended Indian trading yesterday and anti-government protesters closed the airport in Bangkok. Rescue packages, growth and anticipated interest rate cuts have been the major market drivers this week as a sense of cautious confidence has increased risk appetite, supporting the higher yielding currencies internationally.
The UK, Eurozone and the US have each proffered their own version of an economic recovery package this week which, combined with interest rate cuts next week, has bolstered market confidence. In the UK, the Pre-Budget Report released on Monday boosted Sterling as it outlined government plans to ward off a deep and protracted recession. Including the much publicised reduction of VAT to 15% and an increase in the top tax rate to 45%, the report also provided £1 billion for small businesses loans and a raft of other measures designed to prise open the public purse.
Darling and Brown have been heaped with inevitable criticism following the report, with Boris Johnson likening Brown to an alcoholic reaching for the whiskey bottle first thing in the morning. Of particular concern though, is the spiralling government debt the report outlines, expected to reach £118 billion by 2010. As the government slashes taxes and increases spending to stave of recession national debt will soar, essentially making the Pound less attractive to investors. Darling cited ‘exceptional circumstances' making excessive borrowing necessary. Following the report, Sterling strengthened to a two week high against the US Dollar and has remained at the 1.54 level throughout the week. Anticipation of aggressive interest rate cuts by the Bank next week is also contributing to the value of Sterling at present.
The Federal Reserve announced an $800 billion rescue package aimed at mortgage guarantees and credit markets this week and bailed out banking giant Citigroup from the brink of collapse. The European Union approved a 200 billion rescue package for the Eurozone and interest rate cuts are also expected by the ECB next Thursday. Eastern European currencies have experienced a degree of stability this week, benefiting from the stronger Euro against the US Dollar. The Forint, Zloty and Czech Koruna are all trading with smaller ranges than seen in recent weeks. Polish third quarter GDP is due today and likely to impact on Zloty rates.
Growth, or lack of it, has been the other major item on the agenda. Third quarter GDP figures for the UK showed a 0.5% contraction and Darling has revised 2009 growth prospects to between -0.75 and -1.25%. The OECD predicted a 0.6% contraction for the Eurozone throughout 2009 and the US economy has shrunk by 0.5% in the third quarter, its fastest pace in seven years. China has revised annual growth to 7.5% for 2009, while cutting 1% off their base interest rate this week. On the positive side, interest rate reductions and decisive government action are being viewed positively by markets. Oil has risen to $53 a barrel on the back of improved growth prospects.
As the global economic downturn is gaining momentum, we are now seeing governments formulating plans to make it as short and painless as possible. Reducing interest rates, taxes and providing emergency liquidity have been favoured methods thus far and we are likely to see government borrowing soar as a proportion of GDP in the next few years. Estimates of recovery time are still wildly varied. Stimulating consumer confidence to encourage growth is perhaps the most difficult task for governments at present while job uncertainty and property devaluation continue to loom large.
Foreign exchange rates are still eschewing trends in favour of short-term volatility, highlighting the importance of information and timing when it comes to currency transfer. The easiest and simplest way to protect yourself from currency risk is to register with a dealer who will monitor the markets on your behalf. They will let you know the best trading options for your requirements and can contact you when rates reach your desired level.
Have a good weekend!