A depreciating currency is a good thing from the perspective of an export-led economy since it makes goods cheaper in foreign markets, if they are priced in that currency. However, if they are purchased in a local currency which must then be re-converted, the problem is obvious.
What is now clear is that some of the world's leading economies are deliberately debasing their currencies in order to make their exports more competitive and the knock on effect of this on some major currency pairs is significant.
Pound Sterling – UK Markets
Sterling lost ground against the Euro (-0.27%) and the Yen (-0.21%) last week, but gained against the Dollar (+1.3%). Friday’s close saw £1 buying €1.1396; 130.23¥ and $1.6056.
The latest round of minutes from the Bank of England’s Monetary Policy Committee is due to be released on Wednesday. The minutes will provide a detailed insight into the policy decision taken by the MPC, the voting and any divergence in opinions between committee members.
US Dollar – US Markets
A trillion Dollars is a thousand billion Dollars and an immense sum of money by any standards. In the year to the end of September, the US budget deficit fell by $211 billion (the good news) to $1.3 trillion (the bad); representing 8.9% of the US GDP. It is the second worst figure since World War II, but has, at least, moved in the right direction. Despite cost saving measures, costs of unemployment benefits remain a substantial drain on the exchequer with US unemployment at 9.8% of the workforce. Nevertheless, the improvement has been hailed by administration figures as a significant achievement on the road of getting the budget deficit under control.
The Chairman of the US Federal Reserve, Ben Bernanke, has given the clearest signals yet that the Fed is poised for a further round of quantitative easing. This may begin next month and will probably target government bonds; buying large quantities of the bonds depresses their yield, making government borrowing cheaper. The move is likely to cause the Dollar to depreciate against other major currencies and may be welcome news for US exporters.
Euro – European Markets
The Euro has continued to appreciate against all the other major currencies, but the pace has slowed somewhat. We have seen a correction against Sterling after poor employment figures and an implication of quantative easing saw GBP take a tumble against the Euro last Wednesday. In the course of last week’s trading, it gained ground against GBP (+0.27%) however, we are now trading back at circa 1.1428 at 11am today.
The Euro made large gains against the Dollar (+1.55%) last week however this was more to do with Dollar weakness than Euro strength.
The European Union will release consumer confidence data for October on Thursday. Consumer confidence is widely seen as a barometer for the recovery as it relates to consumer’s fears over job security and their willingness to make large expenditures.
Other Currencies – Highlights
The Bank of Canada is due to publish its latest interest rate decision on Wednesday. Canada followed the Australians as only the second G7 country to decide to increase its interest rate since the worst of the global recession passed. The current rate was increased to 1% in September. Any rise in interest rates is likely to lead to an appreciation of the Canadian Dollar since it is a stable currency and it means that investors get a better (though meagre) rate of return on money on deposit.
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