Daily Currency update for SF members courtesy of Halo Financial

(Catharine Higginson) #1

It’s only a baby currency which is why I probably feel sorry for the Euro. At just 11 years of age it is being bullied from all fronts and it was just about weathering the storm of Greece’s potential default and just recovering as the effects of the support package were being felt when a Spanish savings bank gores all ‘Northern Rock’ on it and was placed in administration by the Spanish Authorities. CajaSur was brought down by crippling defaults on property loans and the most surprising thing is that there haven’t been more similar problems in Spain where property prices have slumped and oversupply is the major problem. The Euro lost ground across the board on Monday, especially against the Pound and US Dollar.

Sterling gained momentum as the Chancellor of the Exchequer filled in the gaps on his plans to cut some £6.2 billion of government spending.
The markets generally liked his plans which were centred on what the government sees as wasteful or unnecessary expenditure. It seems the main reason the plans were welcomed is that Osborne made it clear this is just a start and anything which helps stop the ratings agencies from downgrading Britain’s Triple A credit rating has to be a good thing for the Pound. I am sure everyone has their own opinion about the first wave of cuts announced yesterday but the second round of detail comes today when Her Majesty the Queen opens parliament. The newspapers are awash with speculation over what her speech will contain but the scrapping of ID cards and financial support for the installation of speed camera’s are on the agenda. Both get thumbs up from me.

The US Dollar gained ground almost because it isn’t the Euro. Traders and investors see the US currency and US Treasuries as a port of tranquillity when the markets seas are excessively turbulent and yesterday was one of those days. Beautiful blue skies across Britain but dark foreboding clounds gathering across the Euro area.

Those dark clounds are also hovering above the Korean peninsula following confirmation that a South Korean ship was sunk by a North Korean torpedo. The position at the moment involves a lot of surface posturing but there is clearly a lot of work being done behind the scenes to try to avert another war in Korea. Nevertheless, the threat of conflict in the region when one of the countries involved has nuclear capabilities is sufficient to cause nervousness in most financial markets. Asian share prices dropped sharply and fear has driven many speculators to pull out of riskier trades like ‘carry trades’. We talk about carry trades a lot in this report. It is a speculative move where the investors borrows money in a low interest rate country like Japan for example where interest rates are virtually 0% and invests that money in somewhere like Australia where the base rate is 4.5%. It’s an obvious return if the exchange rate fluctuation doesn’t steal the interest rate gains. That is why initial threats to exchange rate levels will cause a sharp unwinding of this kind of trade. The effect of an unwound trade in this instance would be strength in the Japanese Yen and weakness in the Australian Dollar. The same can be said for the Pound and US Dollar as sources for cheap loans and the New Zealand Dollar and South African Rand as destinations for higher yielding investments. That is precisely what we saw yesterday.
However, the effect was perhaps muted by the public holidays in Switzerland, Germany and Canada, which means we may see more of the same today.

The caveat to that last statement is that Sterling’s path depends on this morning’s release of the 2nd (and more accurate) estimate of UK economic growth for the first three months of the year. The first assessment suggested growth of 0.2 percent which was a tad down on the previous quarter but many analysts are hoping for a slight upward revision to 0.3 percent. It they get their wish, then the pound could well rally further despite the looming effects of the current round of spending cuts. However, if the figure is worse than this estimate, then Sterling will be hit in the short term at least. Those who need to buy the Pound may well get their chance in today’s choppy trading conditions. In fact, if the GDP data is better than forecast, then buying Sterling before it rallies could well save Sterling buyers a lot of money.

And finally, I am in awe of Christina Schmidt, the widow of bomb disposal expert Olaf Schmidt who died in Afghanistan earlier this year.
Her dignity in grief and the amazing way she has used that grief to fight for troops serving in this conflict to be better supported is a lesson to us all. Last night’s Panorama program was something Mr Cameron and his colleagues should watch again and then act upon.