Plucky Pound fails to Perform
There is one man who embodies Sterling performance in the currency market this week: Andy Murray. Plucky, dynamic, with outbursts of brilliance but ultimately outperformed by a stronger rival. This week the markets have been much like a tennis match, some short-lived spikes, unforced errors, rebounds and consistent rallies - but the Pound, like Murray, remains plagued by a nagging failure to follow through.
Major news this week has come from the US with only soft data released from the UK and Europe. Lehman negotiations have been the Achilles heel of the US performance, dashing any confidence the Fed may have succeeded in whipping up through the effective nationalisation of Freddie Mac and Fannie Mae.
As the institutions responsible for over 12 trillion worth of mortgage debt in the US the Federal bail out of Freddie Mac and Fannie Mae was designed to engineer stability and stimulation in the flagging US property industry. Yet any positive effects for the dollar were short-lived, dominated by the Lehman Brothers news later that week.
Lehman Brothers, the 4th largest investment bank in the US, failed to negotiate a deal with Korean Development Bank with the breakdown sparking fears of a lack of liquidity within the Bank. Following the announcement on Tuesday, Lehman shares plummeted by 45% with the memory of Bear Stearns to close for comfort for many market watchers.
In combination, both sets of news illustrate the true depth and breadth of the credit crisis in the US, indicating that perhaps the relative strength of the dollar of late is due to things getting worse for rival currencies, rather than better for the US. The balance of trade deficit has also grown significantly since June, entrenching fears of prolonged unemployment and stalling economic growth as US reliance on imported consumer goods, not to mention oil, remains high. We await with interest the Fed interest rate decision due next week.
Amidst the negative week for the US Dollar the Pound has enjoyed a minor resurgence, rebounding from unprecedented lows in a soft week for data in the UK. Although the pound has remained largely weak, viable opportunities have occurred for spot trades to take advantage of short-lived highs.
The Euro has also continued its downward trend this week. The EUR/USD rate dropped to a one year low yesterday amid speculation the European economy could slow at a faster rate than the US and force ECB interest rate cuts. The German economy is facing recession, if the 0.5% contraction in the second quarter is followed by the expected 0.2% contraction in the third and Spain remains teetering on the brink of recession as well.
ECB President Trichet's speech this week voiced predictions the European economy will probably stagnate over the third quarter. Both Trichet and Bank of England Governor, Mervyn King urged lending institutions to ensure their own liquidity in response to the US news. Trichet also highlighted lower oil prices as the potential key to economic stimulation, urging oil producing nations to “act responsibly” in a thinly veiled jab at the OPEC nations decision to cut production earlier this week. Lower energy costs in Spain have seen inflation fall back to 4.9% from a previous 15 year high of 5.3%.
Prime Minister Donald Tusk announced on Wednesday the news that Poland is to adopt the Euro in 2011. The Zloty strengthened on Wednesday following the announcement, with surges in European currencies providing an ideal time to buy Sterling.
In other news the Australian and Kiwi Dollars still provide value for money as both are hovering just above one year lows. The NZ Dollar dropped to its lowest level since 2006 after Reserve Bank Governor Allan Bollard lowered interest rates yesterday. Yen has continued to strengthen and remains a safe bet when risk-appetite diminishes.
Have a good weekend!