Yesterday was a momentous day on the foreign exchange markets, especially for the Pound which broke through exchange rate levels that had previously capped the Pound ... for 18 months in some cases. Expectation that the Prudential would abandon its plans to takeover AIA helped the Pound as the decision not to proceed would result in a sizeable repatriation of funds which had previously been moved out of the UK to support the deal. Sterling also got a shot in the arm from a rise in share prices - even though the FTSE closed down on the day - but rumours that BP might come into play as a possible takeover target also helped Sterling; the funds flow to fund that deal would be immense, even after the fall in BP’s share price has wiped $50 billion off the value of the company.
In contrast to the Pound’s good day, the Euro had another nightmare. It fell to its lowest against the Pound in 18 months and its lowest against the US Dollar in four years but then stopped as traders tried to assess whether this has moved too far and too fast. It is likely we will see some retracement in the movement that has taken place over the last few weeks before perhaps another push to higher levels but that is dependent on many uncertain factors. ECB warnings that European banks would have to write off another €195 billion didn’t help the Euro and neither did a report from Standard and Poors that suggested the housing market in the European area was still overvalued, even after the slump we have witnessed in the last three years or so.
The US Dollar had a very good day overall with improved manufacturing data helping to chivvy things along. The levelling off of oil prices at around $70 per barrel has helped as has the better than expected report from the Institute for Supply Management but the main driver is still the demand from those seeking a safe haven away from the Euro, the Chinese Yuan and the other uncertainties in the markets.
The Japanese Yen weakened after Japan’s Prime Minister Yukio Hatoyama announced he would step down. His decision comes just weeks before elections in Japan and the uncertainty of a new government and a definite change of Prime Minister was always likely to cause some weakness in the currency.
Commodity-reliant currencies like the Australian, New Zealand and Canadian Dollars all lost ground yesterday. The decision from the Reserve Bank of Australia to leave their base interest rate on hold failed to help the Aussie Dollar and the rise of 0.25 percent in the Canadian base rate wasn’t enough to stop the Canadian Dollar from weakening either. The RBA and the Bank of Canada are at very different points in their cycles though. The Australian central bank has already hiked interest rates 5 times in the last 7 months whilst the Bank of Canada has maintained a 0.25 percent base rate for 14 months. The decision by the BOC was, it appears, largely factored into the value of the Canadian Dollar anyway and their announcement that this should not be seen as the start of a series of hikes, was enough to tempt traders to take profit. On the Australian Dollar, overnight news of a better than forecast economic growth report was enough to cause some profit taking on yesterday’s AUD weakness. 2.7 percent growth is something the UK and EU governments would give their right arms for at the moment and this comes in spite of news that the level of Chinese imports has fallen sharply.
In essence, anyone with Sterling to sell is in a far better place this morning than they were before the bank holiday. The question, as always, is whether this is just the start and we will see further rises in the Pound’s value. The answer is that it depends on a number of factors, most of which are mentioned in this report. But it also depends on whether the chancellor’s budget on 22nd June is considered robust enough to start the fight against UK government debt. The markets will be looking for coherence and the credit ratings agencies will be looking for credible maths and as long as each gets what it wants, the Pound could continue to make headway as the month progresses. In the meantime, volatile trading conditions are a cert and considering the pace and magnitude of the recent moves, it would be a bold move to ignore the current attractive exchange rates I the hope of something better later on. It is probably akin to shopping for shoes with my daughters; see a pair that are perfect in the first shop; then trawl around every other shop in the mall for an hour or so before returning to the first shop again to find they have sold out now or don’t have her size any more. This is an opportunity to be grasped in part at least so converting some of your requirements at this level makes uncompromising sense.
Today’s data diary is dominated by this morning’s release of UK money supply, debt and credit data and by this afternoon’s US data releases which include the Producer Price Index (a measure of factory level inflation) and the first of the May employment reports from ADP. However, Friday’s official US employment data will be more keenly followed because the ADP data has been a tad erratic as a forecaster of the official numbers.
And finally, the prize for offending the most minority groups in one swipe must go to the Thai Spice restaurant in North West Adelaide. They refused entry to a blind man because they branded his guide dog as gay. So that’s disabled groups, animal lovers and gay groups that have been offended. The restaurant owners paid A$ 1,500 in compensation to the Dog’s owner, Mr Jolly. However, I can’t help wondering if something has been lost in translation here. At the risk of offending Thai readers, if I say “Guide Dog” with an exaggerated Thai accent, it does sound remarkably like ‘gay dog’. I wonder if the equal opportunities tribunal thought of that.