Daily currency update courtesy of Halo financial

(Catharine Higginson) #1

The holidays in Japan, America and Canada yesterday meant we had minor volume and light volatility for the most part. Traders are still wrangling with the uncertainty over UK spending cuts, the potential for an expansion of US quantitative easing and the various arguments and name calling over countries which try to manipulate the value of their currencies. All countries do it but few are as blatant as China, Japan and Switzerland. Mind you, the Yen and Swiss Franc are particularly strong on the back of safe haven buying so they have every reason to be concerned about the damage such an expensive currency does to their exporters.

Sterling is also particularly weak against the likes of the Australian and New Zealand Dollars but is pretty much mid range against the Euro and is at the top of its recent range against the US and Canadian Dollars. It always brings a smile to my face when journalists print headlines like “Pound surges on...” or “Sterling rallies as ...”. Mostly they are citing the value of the Pound against the US Dollar but the real story at the moment is not about Sterling doing anything in particular; it is about significant weakness in the US Dollar.

Traders and investors are shying away from the USD because they fear the potential for a slowdown in US growth and they fear the Dollar’s reaction if, and more likely, when the Federal Reserve decides to pump further cash into the financial markets in order to keep the growth on track. There is a fear that the Bank of England may be forced to do the same and the Chancellor, George Osborne, has given his blessing to just such a move if the spending cuts have a dampening effect on growth; which they almost inevitably will.

Even if Sir Philip Green manages to get through all the red tape and start reorganising government procurement procedures, the drop in income amongst suppliers to the government will have a slowing effect on the UK economy. However, as many of these contracts are long term ones, it may take a year or so before we see that effect. So that won’t change the short term need for major cost cutting.

We did get some data overnight though; the Royal Institute of Chartered Surveyors reported that house prices in England had slowed but that demand was causing a sharper rise in Scotland. The British Retail Consortium reported a fall of half a percentage point in the pace of high street sales growth. The slowdown in the housing market was the culprit here as well because it was the fall in sales of floor coverings and furniture that caused the drop in the growth rate. This made traders very nervous ahead of the VAT hike which comes into effect in January. And finally, the British Chambers of Commerce reported that the British economy slowed to a rate of just 0.5% in the third quarter of the year and the most worrying sign was a slowdown in the dominant service sector. The BCC urged government to get on with expansion of the Quantitative easing program to avert a sharper deterioration in the pace of growth and potentially a second bout of contraction. Sterling hasn’t declined on these news items which might suggest that all the bad news is already factored into the weakness of the Pound. If the spending cuts announced in just over a week’s time are less swingeing than forecast, Sterling may well mount a significant recovery before the month is over.

Before we get to that though we have today’s barrage of data to contend with. Inflation and trade deficit data will be very closely watched for signs of slowing appetite for high street goods; most of which are imported. So oddly enough, a narrowing of the trade deficit could well be construed as a negative for the UK if imports have fallen faster than exports. We are not expecting a major shift in inflation which means that if there is a significant shift in retail price growth, Sterling is susceptible to the news. It may well be a very lively morning after yesterday’s lacklustre session.

The UK day ends with the release of the minutes from the last Federal Reserve meeting at which they discussed a 2nd round of quantitative easing (QE2 as it has been neatly dubbed). That should make interesting reading then.

Finally, if you are, like me, in your late 40s or early 50s then be very aware that you have barely a few months left before you become grumpy. A poll of 2,000 Brits showed that once over the age of 52, people laughed less than their younger counterparts. It is apparently something to do with losing joke telling skills. Apparently, most Brits only know 2 jokes. I have told you both of mine so I really am grumpy now because I don’t know what to write. Oh no, it’s started already. Humph.

Halo Financial - Contact Us