Brown, but not out
As signs of global recovery are beginning to show, this week a growing divide has become evident between international economies. As one economist put it “there is some distinction between the walking wounded and those in greater disrepair”. Economic sentiment is greatly affecting currency exchange rates at present and the fact that the Australian and Canadian economies are viewed in the former category has led them to an eight-month high against the US dollar this week.
Sterling exchange rates have also reached a seven-month high against the US dollar as confidence in global recovery becomes more entrenched. As more positive economic data emerges, there has been a diversification from risk trades which has benefitted the higher yielding currencies. In the UK, PMIs for manufacturing and the service sector have improved significantly which has been positive for sterling exchange rates. House prices have risen 2.6% on the month and new mortgage approvals are also up, paving the way for recovery in the property sector. UK consumers reported their greatest level of optimism in six months and the pound touched on 1.16 against the euro, a level also not witnessed this year.
The picture has been somewhat different in the US. After the announcement of GMs "surgical" bankruptcy early in the week, economic data has conspired to keep dollar trends bearish. Mid-week, US housing data was better than expected and this boosted international currency exchange rates, although Thursday's negative employment data heightened investor nervousness in the run up to the official unemployment rate released on Friday. The minutes of the FOMC meeting had little effect on foreign exchange markets as interest rates remained unchanged in April.
News has been relatively quiet in the eurozone this week, allowing the euro to plow ahead bullishly against the USD and JPY. The euro reached a seven-month high against the dollar following news that the Australian economy grew in the first quarter of 2009 and the single currency has retained support above 1.42 against the US dollar.
The euro-sterling exchange rate is relatively unchanged from the 0.87 level with the pound having gained an edge on the euro due to the market perception that the UK economy is well positioned for recovery. Both the Bank of England and MPC opted to leave interest rates unchanged at 0.5% and 1% respectively and European retail sales rose for the first time seven months.
In eastern Europe, Polish zloty has slumped 25% against the euro since July and the credit rating for Polish debt is currently regarded as less safe than the Czech Republic and Slovakia.
The Australian economy has surprised economists by reporting 0.4% growth in the first quarter, defying the recession that has dragged down the US, European and Japanese economies. Australian equities and currency exchange rates rose across the board with the Australian dollar reaching USD0.82, the highest level in eight months.
While the pound has reached highs not seen for some time against the US dollar and euro, there is a perception in the market that sterling is overbought and a natural correction may occur. Still, that does not detract from the fact that for anyone selling sterling, this week was the best time in the last seven months to do so.
This volatility is a reminder of the importance of timing when it comes to currency transfer. As we see more evidence of global recovery, we may see the higher yielding currencies push higher trading ranges against the safe havens. If you have currency to trade, get yourself registered so you don't miss out.
Have a good weekend!