The positive momentum has flowed into equity markets and currency exchange rates this week. After a long, dark winter of discontent, signs that recession may be easing have improved investor sentiment around the world. The benefits of this have been evident in euro and sterling exchange rates, as both currencies surged against the US dollar this week. Perhaps the next batch of economic worries will come from government budget deficits as credit ratings have already been making waves, but for this week, with a lack of negative data to blight the picture the pound has remained strong against its international currency partners.
In the UK, the conspicuous lack of data this week may be responsible for the bullish run of the pound. After a bank holiday on Monday, markets opened on a weak note as North Korean missile tests triggered safe haven buying. US consumer confidence was the piece of data which turned things around. Posting the best results since November, improved confidence in the world's largest economy created a wave of optimism internationally which saw the pound shoot through 1.60 to a seven-month high against the dollar. The pound has since retired to the more familiar 1.58 level but we could see sterling break out of recent ranges as confidence continues to improve.
In the US data has also been relatively thin on the ground. US markets began the week with a public holiday too and thin trading led the euro to gain on its major currency partners. As the week wore on it became apparent that the major concern of investors stateside is government debt and more importantly, how to finance it. While budget deficits have ramifications throughout the entire financial spectrum, in terms of currency exchange rates the major legacy of this uncertainty is unease. And as we know, unease leads to safe haven buying and dumping risky assets.
Perhaps the factor that has prevented a wholesale return to risk aversion is the growing consensus that the pace of recession is easing. As investor sentiment has improved, this is encouraging a wider distribution of funds and a breakdown of the bad news = safe haven buying relationship. While not to say this relationship is forgotten, it does show the prospect of global recovery has enough momentum to endure intermittent bouts of negative data.
Eurozone economic news has been dominated by General Motors this week. On the verge of bankruptcy, the European division of GM is desperately seeking a buyer. Failure to secure one would put thousands of jobs in Germany and the UK at risk. The German government is heavily involved in negotiations and has pledged billions of euros in finance to the potential buyer. Unemployment in Germany has risen to 8.2% and the euro touched on 1.40 against the US dollar, before sliding back to 1.38 this morning.
In eastern Europe, risk appetite remains crucial to currency exchange rates. The Lithuanian economy shrunk 13.4% in the first quarter and Hungary may need to take out another IMF loan later in the year. Polish zloty weakened to its lowest level in more than a week against the euro and the Polish Central Bank opted to keep interest rates unchanged in May. Watch for waves of global optimism which often boost eastern European exchange rates.
In New Zealand we witnessed a clever bit of pre-emption this week from finance minister Bill English who deferred tax cuts on the basis of government budget deficits. This was met with approval by the Standard & Poor's which improved New Zealand's credit rating and the NZD strengthened to USD0.61. The kiwi has risen 23% in the last three months against the dollar.
It is likely that government deficits will come under increasing focus in future as they affect the rate of recovery for individual economies. The property market also remains integral to wider economic recovery and economists predict that although we may see a return to growth by the end of 2009 for the US and UK, recovery in property and employment sectors could take significantly longer.
In terms of currency exchange rates, the pound and euro have been testing the top end of ranges recently, as are many of the higher yielding currencies: the CAD, AUD and NZD in particular. This trend could be set to continue as confidence grows and it could well be worth placing automatic orders in case currency rates spike overnight. Those who had placed automatic orders for the pound-US dollar will be laughing now after the pound reached that seven-month high. Get registered with Currency Solutions and your broker can arrange one for you.
Have a good weekend!