Daily currency update courtesy of Halo financial

(Catharine Higginson) #1

Well if you thought the defence cuts announced yesterday were odd, ‘you ain’t seen nuthin yet’ to coin a phrase. The bazaar announcement that we are committed to buying two £5 billion aircraft carriers but can’t afford the jets to put on them was just one of the elements in this scary set of measures and if the breadth and depth of those announcements are anything to judge by, we can expect further scares when George Osborne speaks at 12.30 UK time today.

The markets are braced for the worst of it and Sterling’s limpness is testament to that but, having priced in the worst case scenario, the Pound probably doesn’t have far to fall but as long as today’s announcements are only bad and not crippling, then Sterling could well rally in later trade. This is undoubtedly a momentous day and one from which the repercussions will be felt for decades to come. Let’s just hope the chancellor is gentle with us.

Before he speaks we get the minutes from the last Bank of England meeting at which interest rates and quantitative easing targets were left on hold but we believe the votes for these were not unanimous. It is likely that Andrew Sentence voted for an interest rate hike while Adam Posen probably voted for further expansion of QE. Whether either committee member managed to gain further support is the question. We’ll find out at 9.30 London time.

But the markets aren’t just concerned with events in the UK; China’s surprise announcement that they were raising interest rates by 25 basis points sent a wave of excitement through the markets. It came on a day when several central bankers were speaking separately about the dangers of currency market manipulation as a means to distorting trade and the World Trade Organisation warned that currency market turmoil could derail recovery. It also comes after years of rhetoric from the US about how China should allow its currency to strengthen to balance the trade imbalance between China and the rest of the world. This doesn’t go far enough and is in line with past moves by China to do just enough to be seen to be serious about allowing its currency to strengthen but not doing so much that it actually happens. That would rob China of a major trading advantage and they were never going to surrender that Ace in a hurry. However, they do feel the need to rein in the property market and avoid a property asset bubble a la America and Europe in the early part of the last decade.

What happened after the announcement was a bout of US Dollar buying as traders unwound their more speculative and perhaps riskier cross border investments. Reports overnight suggest a lot of the excitement has gone out of that move and we start today in the UK at similar levels to yesterday’s close.

Further afield, the difference between Australia and New Zealand’s fortunes are becoming ever starker. The Reserve Bank of Australia is hinting heavily that they will seek to hike interest rates in the months ahead while in New Zealand, the slump in dairy prices as reported by the Fonterra Cooperative Group made traders nervous. NZ is a major exporter of dairy produce to Australia and China so a fall in income is a very negative development. As you might expect, the Aussie Dollar strengthened while the NZ Dollar lost ground across the board.

So as we settle down to await the Chancellors chilling dictum, I’ll leave you with news that, if you thought this morning as cold in England, we should be ready for worse in the months ahead. Some weather forecasters use technology, others use bits of seaweed and stones but the people at the Wildfowl and Wetlands Trust nature reserve at Slimbridge, Gloucestershire just keep a wary eye out for Berwick swans which arrive from Russia each year. An early arrival is usually followed by a sharp cold spell and a cold winter. The swans have already arrived this year so get up in that attic and get those thermals out of storage.