Risk Aversion Returns
Pound Sterling - UK Markets
The Pound has sunk to 1.46 against the US Dollar and is over 1% lower against the Yen as British Chamber of Commerce and BRC statistics provide evidence of the deepening economic downturn.
Monthly snapshots released yesterday showed retail sales down 3.3% from last December and widespread contraction across the service and manufacturing sectors. Home sales, factory orders, manufacturing sales and job prospects have all reached record lows and the BCC warned of ‘frightening deterioration' across all economic sectors. Growth forecasts have been revised to -2.4% in 2009. The collapse in confidence has led to predictions GDP will contract 1.5% in Q4 and even exporters are not benefitting from the low Pound as global downturn forces foreign markets to contract. With the cost of borrowing already at record lows the MPC is running out of conventional stimulus policies and may move to more unorthodox methods to stimulate the economy. Balance of trade figures released this morning show a -£4.5 billion deficit which could provide a source of weakness for the Pound throughout the day.
US Dollar - US Markets
The US Dollar strengthened overnight to 0.68 versus the Pound and 0.75 versus the Euro as risk aversion dominated markets.
News of the deepening global recession has created a negative trend in equity markets leading investors to sell off the higher yielding currencies in favour of the traditional safe havens. A Bloomberg Survey has announced the US economy is likely to contract 1.5% in 2009 with the Federal Reserve not able to raise interest rates until 2010. Trade balance and consumer confidence figures out today could hamper market confidence even further.
Euro - European Markets
The Euro reached a one month low against the US Dollar and Yen overnight as the Standard and Poor's announced it may cut Spain's credit rating. Against the Pound, the Euro is up to 0.90 as the Pound has been knocked by the ‘frightening' state of the UK economy.
Falling inflation rates and negative economic data in the Eurozone is showing the Euro is not as well positioned to weather the recession as initially thought. Market perception at present is that the ECB has dragged its feet in providing interest rate cuts and will have to act now to stimulate the Eurozone economy. Weakening of the Euro/Sterling rate is to some extent a correction of the overheated selling we saw during the Christmas period. Industrial production figures are due for the Eurozone tomorrow with the ECB decision on Thursday.
Other Currencies - Highlights
The Aussie Dollar fell to two week lows against the US yesterday as investors sought safe haven currencies. Negative figures from the US economy are pushing down growth forecasts and commodity prices internationally which has a strong bearing on the strength of the Aussie and the South African Rand. The Kiwi also declined against the Pound and US Dollar, affected by increased risk aversion. Unemployment figures are due in Australia on Thursday.