What A Year

From the highs of the Royal Wedding where the UK was an idealistic nation, viewed upon by the rest of the world as a picture perfect family. To the lows of the last week, where thugs have run riot, killing off a stable year and making a mockery of our nation – a year prior to the Olympic Games. Public spending cuts that were due to reduce the number of police by 2,000 over the next four years are now heavily in the spotlight. Just a few weeks ago I viewed our proposed cuts as sustainable and manageable, but recent events have shown just how fragile the road to recovery may be.

Pound Sterling – UK Markets

With little data due to be released in the UK today I feel there is a good opportunity to discuss the events of yesterday. It is apparent that Bank of England Governor Mervyn King is taking his usual ‘dovish’ stance towards the UK’s economic outlook. Yesterday simply confirmed this. However, King also stated that a second round of quantitative easing could still be used. Whilst the committee chose not to enforce this last week it appears it may only be a matter of time before they put ‘QE2’ in motion. Most notably, King chose to comment on our net trade position, which draws us in to the sterling debate. It is in the government’s best interest to ensure the pound stays affordable for the sake of economic growth. With cuts in domestic spending showing no signs of relaxing, the priority has moved towards exports. A devalued pound should boost a worrying trade deficit. However, so far this has not been the case. Bring on ‘QE2’?

US Dollar – US Markets

The grim period for the US Dollar has continued as the greenback fell against the majority of its major counterparts overnight. Futures indicated a rally in US stocks will buoy higher-yielding assets after the Federal Reserve this week said it may expand stimulus to revive the stagnant economy. Most investors feel that the dollar is living on a knife edge. With data coming in thick and fast it will undoubtedly be a volatile few weeks ahead for the global powerhouse.

Euro – European Markets

Once again, with little effect on the euro itself, overnight reports have indicated that as much as 10 billion euro’s has been wiped off French banks. The markets continued to plunge and Monsieur Sarkozy had to rush back from his holiday to attend to the country’s public finance issues. There have been rumours surrounding a potential sovereign downgrade and also the health of bank Societe Generale. Germany, the other major player in the eurozone has launched a political attack on Chancellor Angela Merkel. She faces growing discontent from within her own camp over the continuing debt crisis. It appears that they too are growing tired of money continuously being thrown at fellow eurozone nations and being dragged into a pool of debt. The current 440 billion euro’s made available by the European Financial Stability Framework is far less than would be required should Italy or Spain seek financial aid. This is now looking more likely by the day.

Other Currencies – Highlights

The rapidly appreciating value of the Swiss Franc is quickly killing off exporters in the nation and the Swiss National Bank has therefore announced measures to try to reduce the value of the currency. Whilst they stopped short of announcing direct interventions, they are likely to conduct foreign exchange swap transactions. However, unless investors stop piling funds into the franc more of the same is expected. The yo-yo pattern of the Australian and New Zealand Dollar has continued. As US stock futures rose, investors have once again renewed their interest in higher yielding assets. It’s by no means safe, but it does have the potential for hefty returns if investors play their cards right.