England Champions on the Pitch
While the English may be champions on the football pitch, with Manchester United, Chelsea, Liverpool and Arsenal making it through to the quarter-finals of the Champions League, the edge in currency markets belongs firmly in the hands of the Euro. This week Sterling has lacked the legs to sustain even the most minor of rallies, in a diary packed with economic data and dominated by international risk trends.
The Pound has been driven ever-lower this week as a number of factors contribute to Sterling's economic woes. Severely weak industrial production and manufacturing figures were symptomatic of an economy in deep decline and trade balance figures reflected this, showing a deficit of -£7.7 billion in January. This week has also brought the start of the Bank of England's £75 billion quantitative easing programme which kicked off with a gilt auction and is designed to stimulate the UK economy over the next three months. Will it work? No-one knows but investors remain wary and this has kept Sterling trends neutral and dampened any real appetite for the Pound. Sterling has been confined to below 1.4 against the Dollar and is back down to single figures this morning against the Euro.
News from the US has dominated markets this week, herding investor dollars towards the safe havens as appetite for risk remains low. The big news has been that Citigroup and JP Morgan Chase, two of the remaining major Wall Street investment banks, have both announced they operated profitably in the first two months of 2008. Amongst stock markets the relief was palpable and this inspired a minor rally that briefly boosted the higher yielding currencies. However these have since been driven back to the lower end of ranges as markets nervously await the announcement of retail sales figures for the US in February. Consumer activity in the world's biggest economy is such a behemoth of an industry that it actually affects currency exchange rates throughout the world. Watch for volatility surrounding the announcement.
Ben Bernanke also gave a speech this week stating that US recovery could begin by the end of the year. Many economists are regarding this as optimistic to say the least, but this news also provided a short burst for equity markets and intermittently, currency exchange rates. On the other hand, Moody's has announced a list of ‘bottom rung' US companies that it expects to go bankrupt including the big 3 auto manufacturers - GM, Ford and Chrysler and a number of media giants. Failure of major companies and an increasing unemployment rate are likely to exacerbate risk aversion in future.
The Euro remains an enigma. Despite evidence of marked economic deterioration, the Euro has been maintaining strength while risk aversion dominates and Sterling is under pressure from domestic data. ECB President Trichet this week gave a speech stating that ECB interest rates are unlikely to go beyond 1%. The fact that this policy remains at odds with central banks around the world is weighing on the Euro. Interestingly though, the ECB overnight deposit rates are at 0.5% - the same as the Bank of England base rate - and this essentially serves as a back door method of stimulating lending, providing a reply for some of Trichet's critics.
In Eastern Europe, Zloty has tumbled 26% against the Euro in the last 6 months. This makes Zloty the worst performer of the emerging currency market with the Hungarian Forint and Czech Koruna close behind. The Czech central bank has neglected to revise growth forecasts downward and is currently predicting a 0.9% economic expansion in 2009. Despite their significant downturn however, these larger Eastern European nations remain significantly better off than some of their regional counterparts, including Latvia and the Ukraine.
In the Asia-Pacific region this week, the Reserve Bank of New Zealand appeased markets by cutting the base rate to 3%, a reduction of 50 basis points which sent the Kiwi to two weeks highs against the US Dollar. The Australian unemployment rate has risen to the highest level in 4 years and Japan's economy is shrinking at the fastest pace on record since 1974. Unfortunately for Japanese exporters, this only served to strengthen the Yen further.
So much the same as last week, currency exchange rates continue to be driven by international appetite for risk. Throughout the world, the economic situation is grim and this is compounded by uncertainty over government responses and policy activity. Demand for currencies without the benefit of safe haven status is limited, as evident in Sterling - Euro exchange rates. Sterling weakness has become such an entrenched theme that the Pound has even been excluded from market rallies this week. Time to start controlling those controllable when it comes to foreign exchange!
A number of economists are predicting the Pound could be approaching a bottom against the Euro. However, quantitative easing remains a significant wildcard and the US situation is just too unstable to be making predictions without factoring in US activity and of course, appetite for risk. As always, information and timing are crucial. Be sure to get yourself registered so you have access to the best exchange rates as and when they happen.
Have a good weekend!