Thursday saw the continuation of frantic assessment, accusation and rebuttal over the effects of the Chancellor’s spending cuts. Ministers from the coalition were all over the place trying to allay fears and confirm the cuts would be felt fairly across the UK while the opposition and various think tanks and lobbyists sounded like disgruntled teenagers as they told us ‘it is just so unfair’. I can’t help feeling there is a denial process in play here where we were somehow supposed to stop overspending but without anyone being affected. T’ain’t possible I’m afraid but that won’t stop the arguments.
Either way, the Pound was swished this way and that throughout the day as those in the financial markets made their own assessments of the financial impact on the UK. In the end Sterling closed roughly where it opened in spite of a very volatile period of trading. It had though fallen sharply overnight into Thursday so the fact that it didn’t collapse any further is cold comfort for those with Sterling to sell. Nevertheless, Sterling buyers are getting the opportunity to fill their boots and that was certainly the pattern yesterday. As markets forecast a slowdown in growth to just 0.4% in the 3rd quarter, it is not surprising that the chancellor is pressing the Bank of England to expand its stimulus operations but judging by the voting pattern shown in the BOE minutes, his cries are falling on deaf ears at the moment and quite frankly, if the BOE is only remitted to balance inflation, that would be entirely the wrong thing to do right now.
The US Dollar is also having a torrid time at the moment. Yesterday’s US data followed the dire recent pattern and that has kept the US Dollar weak for the last few months. However, comments from the US treasury secretary and other comments from G20 ministers ahead of the G20 meeting which started yesterday steadied the ship a tad. There has been a lot of media debate over whether countries are attempting to gain competitive advantage in the export markets through devaluing their currencies or, perhaps more correctly, allowing their currencies to devalue themselves through benign neglect. Of course that is happening but it is the elephant in the room as far as the G20 meetings have been concerned in the past. It looks like they may actual discuss the D word at this weekend’s meeting and I am happy to make a prediction here and now. If they do announce that this matter was discussed, they will release a communiqué which says they are all against such a policy. And they then will go back home carry on as before. Meanwhile the US Dollar will remain weak until traders are more confident in global growth levels. Their confidence may well be helped if, as expected, the Federal Reserve commences its plans to expand quantitative easing when it meets next week.
Nearer home in Europe, French protests about plans to raise the retirement age to 62 seems to have upset the people furthest from retirement the most. Students have been out in force and the French government is being pressed by President Sarkozy to push the measure through quickly to avoid further strife. That isn’t necessarily moving he Euro at the moment; Euro strength is largely being driven by US Dollar aversion but this morning’s German IFO business confidence survey will be influential and the strong Euro us certain to have dampened the ardour of German exporters. We may head into the weekend with a slightly weaker Euro as traders take profit on this week’s gains. Incidentally, in the same week that the UK announced massive spending cuts, the EU voted to increase its own budget by 6%. Apparently the EU runs as efficiently as it could possibly be and there is no need to look at spending reductions there. I am glad they are getting the message that ‘we are all in this together’.
Elsewhere, the Canadian Dollar weakened yesterday as the US Dollar continued to wane and as the price of oil slipped on the commodity markets. The fact that Canadian economic growth slowed to just 1.6% won’t have helped the CAD and the fact that the Governor of the Bank of Canada, Mark Carney is reported to have told journalists that he expects the US Federal Reserve to expand the money supply next week will have added to the confusion.
That is about it for this week but the month still has another week to run and Monday will bring analysis of the G20 action or inactions, depending on what happens. The markets are still very volatile and the number of pressures has not diminished. In essence, if you need to buy Sterling, I would suggest taking a close look at your requirements while the Pound is at a 6 month low against the Euro, near a 25 year low against the Aussie Dollar and near shorter term lows against the US Dollar and Canadian Dollar. If you are fearful or hopeful of further Sterling weakness, then you are not alone but technically speaking, we may be near the bottom of the range on most Sterling related currency pairs.
I’ll leave you to meander into the weekend with this thought, There are 100 billion galaxies in the universe and an average galaxy contains about 200-300 billion stars. If each of those stars has 7 or 8 planets in orbit, there can be no doubt that somewhere out there, on one of those trillions of planets, someone has announced larger spending cuts than George Osborne announced on Wednesday. Do you feel better now you can see it all in context?
cat (Catharine Higginson) #1