Sir Alan, you're hired!
This week has been one of tempered optimism for international currency markets. Sterling reached its best currency exchange rate for 2009 against the euro, following a seven-month high against the US dollar recently. Internationally, markets have been awash with speculation that the Federal Reserve may raise interest rates in late 2009, although the USD has also been burdened by the weight of expectations and as a result, has suffered some downward pressure. The major winners of the week have been the higher yielding currencies, particularly the Australian dollar and pound, which seem to have cemented themselves as the currencies of choice when risk appetite is strong.
In the UK, disastrous results for the Labour party in the European elections drove sterling downwards as it appeared a leadership crisis was imminent for Labour. The pound plunged below 1.6 against the US dollar and 1.14 against the euro as a result of the political turmoil. After a crisis meeting, news that Gordon Brown had secured party support, for the time being at least, allowed sterling volatility to settle and industrial production figures triggered a bullish run for the pound later in the week.
UK industrial production rose in April, for the first time in over a year, adding to the view that recession is abating in the UK. With a rise also reported in manufacturing production, these figures drove sterling to its best currency exchange rate against the euro this year. The pound touched on 1.1722 before falling back to 1.1714 and rose to over 1.64 against the US dollar. The NISER is currently putting the UK economy on track for a return to growth in the second quarter of 2009, which would make the UK one of the first to exit the recession. While these figures are far from conclusive, they have boosted sterling exchange rates internationally and renewed optimism that Bank of England policies: devaluation of the pound, low interest rates and quantitative easing, have been effective in stimulating the UK economy.
The US dollar has suffered a rougher ride this week. Plagued by rumour and speculation, US dollar exchange rates have been subject to downward pressure over uncertainty surrounding the state of the US economy. Early in the week, speculation that the Federal Reserve would increase interest rates by the end of 2009 triggered a demand for riskier assets, boosting the pound, euro and Australasian dollar currencies. The announcement from treasury secretary Geithner that ten major US banks would repay government funds, lent to them in the height of the financial crisis, added to the opinion of growing stability in the US financial sector.
However, news that the US trade balance had fallen to USD -29.2 billion and Russia's central bank was considering transferring its dollar reserves into IMF issued bonds, capped the rise in risk appetite as it renewed fears the worst may not be over for the US economy. Although the fact that retail sales figures for May rose by 0.5% while jobless claims for June declined less than expected, have reignited risk appetite moving forward.
The week has been rather unremarkable for the euro exchange rate, which has suffered at the expense of increased optimism surrounding the UK economy. French industrial production contracted by a greater degree than expected, shrinking 1.4% in May. German industrial production was also lower than expected, in contrast to results for the UK and this added to the market view that the eurozone could take some time to emerge from recession. Also this week, the Standard and Poor's downgraded Ireland's credit rating to AA and the Swiss unemployment rate rose to 3.5%, both of which had a negative effect on euro exchange rates.
Around the world, from the US to New Zealand, property markets beginning to stabilise and this could help pave the way for economic recovery. This week the Kiwi dollar has gained the most in two weeks, following the RBNZ decision to keep interest rates on hold at 2.5%. The Australian dollar has also benefited from fewer than expected job losses and news that China is to increase spending on roading and infrastructure which would fuel demand for Australia's commodities.
So at present, while some economists are suggesting sterling is overbought and this is just one of many false dawns for the pound, this doesn't change the fact that recent days have brought the best sterling-euro exchange rate we have seen all year. This is also hot on the heels of the seven-month high the pound reached against the US dollar. As economies begin to haul themselves out of recession, these spikes may occur more frequently and be accompanied by an underlying bullish trend for many of the higher yielding currencies. Watch for gains in the Aussie, Canadian, New Zealand dollars and of course the pound, with the return of market optimism.
If you need to transfer currency, particularly pounds into euros, now is a better time than most. For the rest of your international currency transfer, remember to get your self registered with Currency Solutions and your personal currency broker will ensure you gain the best exchange rate within your time frame for currency transfer. Alternatively, set one of our stop loss or limit orders and trade automatically when the rate spikes in your favour.
Have a good weekend!