Daily Currency update for SF members courtesy of Halo Financial

(Catharine Higginson) #1

Do you feel different? Britain is now under a new regime in which David Cameron and Nick Clegg rule the roost in 10 Downing Street but we don’t yet know the policies and/or concessions that each party has made in order to forge this alliance. I am sure more will be revealed today but the markets were very interesting to watch as each card was played yesterday.

The announcement that the Lib-Dems were meeting Labour produced a slump in the Pound; when we heard that the meeting was over in less than an hour and “never really got off the ground” the Pound rallied. When Brown resigned before an agreement had been reached between Cameron and Clegg, Sterling slipped but when Cameron was seen visiting the Queen, Sterling rallied again. Underlying all of this was the market’s core concern; had Cameron traded away his commitment to cut the deficit this year? When it became clearer that this part of Conservative policy remained largely intact the Pound gathered some momentum and we start today with Sterling at the top of its range against a number of currencies.

There are a lot of dark clouds on the new administration’s horizons; not least the concerns over Britain’s major trading partner, Europe. Not only are traders worried about the efficacy of the immense Euro protection package which was announced over the weekend but the fact that Britain didn’t take part in the funding of this plan has caused a number of EU officials to warn that Britain will be on its own if the credit contagion permeating the Euro area has an effect on the UK. Jean-Pierre Jouyet, an ex-Europe minister for France and the current chairman of France’s financial services authority, summed up the sentiment when he predicted “a rudderless Britain after it snubbed its euro zone neighbours.

He continued, "There is not a two speed Europe but a three speed Europe. You have Europe of the euro, Europe of the countries that understand the euro … and you have the English” (I think he meant British but we’ll forgive him his geography). “The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you. If you don’t want to show solidarity to the euro zone, then let’s see what happens to the United Kingdom.” He has perhaps forgotten that we aren’t members of the Eurozone and if they handle further problems in the churlish begrudging way they have handled Greece’s issues, it could be argued that arms length is the best distance from the Euro. Monsieur Jouyet also suggested that Britain was highly likely to lose its triple A credit rating as the new government wages war on the debt level which is currently higher than that of Greece. The difference is that Britain retains its credit status because it has always paid back debt and that is what credit ratings are about.

Interestingly, German Chancellor Angela Merkel is under huge pressure after she cancelled popular tax cuts in order to fund Germany’s €109 billion contribution to the EU rescue fund and this has cost her a government majority and has made her a pariah in the eyes of the German press. No one ever said it was going to be easy Angela but perhaps a rise in German economic growth numbers will help your cause. That data is due this morning.

And Europe isn’t out of the woods despite the approximately € 1 trillion that has been put into the pot to protect the Euro from attack. Investors and traders are clearly rattled by the manner in which this has been handled and the record high in the price of gold suggests they are happier in safe havens than investing in anything Euro related. The fears of further EU problems are evident in the weakness of the Euro across the board and even in its most pessimistic moment in the last few days, Sterling has still maintained a relatively strong stance against the Euro.

But the decline in the markets’ appetite for risk has been seen in the strength of the US Dollar and Japanese Yen; both sources for funding of carry trade investments when risk taking is a popular option, and we can see the decline in risk appetite in the weaker levels of the Australian and New Zealand Dollars. This has offered some respite to those who have suffered the worst buying levels in these currencies in decades.

Mr Cameron’s first piece of data as Prime Minister will be this morning’s unemployment and earning data. A slight improvement is forecast for all numbers so Sterling ought not drop back during the day and may even extend its gains as the shape of the new cabinet is revealed and the concessions on policy are announced. We also get the Bank of England’s quarterly inflation report this morning so Cameron will have a steer on what the BOE thinks of the state of play and the likelihood of further inflationary problems ahead. Inflation is currently running at levels more than 15 above the bank’s central target of 2.0% and interest rates are based on the bank’s 0.5 percent level which it maintained for the 14th straight month on Monday. By rights the BOE should he hiking interest rates to calm inflationary pressures but they really couldn’t think of doing so while economic activity is so very depressed. The fear around the market is that they will conclude that higher inflation is unavoidable but we will await their plan to deal with it with real interest.

That is about it right now but these are some of the most volatile markets most traders will have witnessed in a couple of years; perfect conditions for grabbing both the top and bottom of the ranges and yesterday bought us both extremes within a matter of hours of each other. Exchange rate hunting has never been so easy.

And finally, if your name is Richard Smith, what would you prefer to be called by your friends? Rich Smith or maybe Dick Smith or perhaps Ricky Smith? Nah, too straightforward. How about Stormhammer Deathclaw Firebrand because that is what Richard Smith from Carlisle has chosen to change his name to by deed poll. I hear he is very nice to his mother and kittens though. So that’s nice.

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