Daily currency update courtesy of Halo financial

(Catharine Higginson) #1

We hear this morning that 9,000 public sector workers are paid more than the Prime Minister; that’s a lot of very healthy salaries coming out of our taxes but the amazing figure is that 6,500 of those work in the National Health Service. Call me a cynic, because I am and I won’t be offended, but I would wager few of that number are clinical staff. If spending cuts must be made - and they must - I can feel the spotlight finding its focus, can’t you!

German producer prices rose at an annualised rate of 3.2 percent last month; down from the previous month’s 3.7 percent and below market expectations. The oddity in this news was the food price inflation which rose from last month’s 0.1% to 1.4% in line with commodity market rises elsewhere. The markets were largely unmoved by this mixed news as first Ireland and then Portugal were rumoured to be very close to having to call in financial support from the International Monetary Fund. This heightened fears that the banking crisis is far from over in the Eurozone and played into the hands of those who have been critical of the lack of clarity amongst EU banks over their debt levels. The Euro is, understandably weaker against the US Dollar after that news but Sterling failed to make any significant gains against Europe’s common currency.

We are also seeing moves from the European Authorities suggesting they will try to wean EU banks off the cheap and easily available money that the ECB has put in place over the last two years. This will have to handle very carefully if they are to avoid another credit crunch but may well weigh on the Euro until firm plans are unveiled.

Sterling is hampered by mixed signals and nervousness ahead of January’s VAT rise. The fragile state of the UK economy is not enhanced by a surprise fall in high street sales but the Bank of England’s signal that they see inflation staying above target for a considerable time to come has provided some support for the Pound. Apart from the pressure from the US Dollar and Euro, this week’s major Sterling influence will be the public sector debt figures which we will see tomorrow.

A lot is being made of last week’s intervention in the currency markets by the Bank of Japan in an effort to weaken the Yen but the market reaction has been perhaps less strong than many would have imagined. If the BOJ is signalling that JPY 86 to $1 is a target level and that they can’t allow the Yen to drop below JPY 83 against the US Dollar, then these would seem perfect targets for speculators to make a small killing but we haven’t seen that develop; perhaps due to today’s Japanese public holiday subduing trade.

The Swiss National Bank was also rumoured to be selling Swiss Francs although they had previously suggested they had no funds or stomach for such an undertaking. However, after they announced that Swiss interest rates would remain on hold at their quarterly meeting, the Swiss Franc suddenly lost 2 cents against the Pound and that did not look like a market led move because most traders were expecting just such an announcement. Whether they will continue in similar vein is unclear as they haven’t even admitted intervening this time around but we may soon know because the Swiss Franc is strengthening again this morning.

In contrast the Australian Dollar strengthened through the week on speculation of higher Australian interest rates in 2011 making the Aussie Dollar even more attractive to international investors than it already is. A word of Caution came from Prime Minister Julia Gillard who says that on purchasing power measures, the Australian Dollar is 27% overvalued. I know that a lot of Australian bound migrants are hoping this corrects itself in the near future but, if the Australian Dollar remains attractive to investors seeking higher interest rate yields, that may be a vain hope.

This week’s main event is the US interest rate decision. Few are forecasting any change in the base interest rate of virtually 0% but the Federal Reserve’s plans to extend the time frame of their quantitative easing programs - if not the magnitude of the fund - will be the major talking point. Will they extend fiscal stimulus plans further or pause or perhaps consider other options? All, some or none of these questions will be answered on Tuesday night and traders are likely to be very agitated and animated about this diary item. In the meantime, the US Dollar is likely to trade in small recent ranges but don’t be surprised if sizable spikes and troughs occur as well. Today’s US housing data is expected to confirm that the US housing market is struggling to grow and bodes very badly for the US economy as a whole.

And that is about that for the start of this week. I will finish with an economy related story of sorts; when I was last in Eire, I drove from Cork to Dublin on the new motorway and everyone was very excited that it cut the journey time in half but I noticed two things. One was that there were no speed limit signs of any sort which meant you had to stick with the other traffic and hope for the best and the other was that there were no motorway services. Apparently the Irish government has run out of money so refreshment breaks may involve excursions away from the motorway or trips to convenient bushes. I wonder if they will ever put speed signs up or whether that is also a victim of budget cuts.