Daily Currency update for SF members courtesy of Halo Financial

(Catharine Higginson) #1

We live in very interesting times. The markets were loving the almost imminent agreement between the Lib-Dems and the Conservatives as evidenced by the strength of the Pound which rallied by two cents against the Euro and for cents against the US Dollar during Monday but those loving feelings were dashed when Gordon Brown was forced to announce his resignation in order to allow a dialogue between the Lib-Dems and Labour. Sterling slumped on the news. I am sure Gordon thinks that was because he was leaving and everyone was sad but, at the risk of disappointing our soon to be ex-Prime Minister, it was much more evident that the fall of the Pound had more to do with the ‘cuts later’ approach that the Lib-Dems and Labour prefer when they talk about the UK budget deficit.

Today is seen by many as being crunch time for the parties to agree a deal and it may well be that the party which received the most votes and won the most seats doesn’t get into office and the other possible outcome is a Lib-Dem /Labour coalition which would be a minority government with plans to delay tackling the budget deficit until next year. Sterling is not going to react well if that is the outcome.

The other major play of yesterday was the finalisation of the agreement within the EU and with the aid of the International Monetary Fund to stump up three quarters of a trillion Euros to avoid the Greek debt crisis pervading the rest of the Eurozone. Their efforts were bolstered by a massive cash injection by the US authorities as well but the debate still rages over whether this will stop the rot and whether it would be enough if the problem started to spread to the obvious candidates of Portugal, Spain and Ireland. These three plus Greece have, rather disparagingly been referred to as the PIGS and grouped together because of their fragile economic conditions. The announcement of the rescue package was initially greeted with Euro weakness against the Pound which was being bolstered by the hope of an agreement between the Lib-Dems and the Tories but as that deal looked more shaky and the questions started over whether the rescue plan was big and robust enough, Sterling slipped and the Euro was flattered by the effects. Against the US Dollar though, the Euro had rather a good day but these short term moves mask the longer term problems with the current arrangements. The Eurozone appears to be a little too happy to bend its own rules for most market participants’ tastes and the packages of measures outlined are less a cohesion of the Eurozone alliance than they are protection of some members against some others. That is an odd kind of gang to belong to and recent events have virtually destroyed the premise of the Euro as a reserve currency; an aspiration that the founders of the Eurozone held and an ‘inevitability’ that was being espoused as recently as the end of 2009.

For its part, the US Dollar has been exceedingly volatile in the last few days as it has been bought and sold by knee jerking international investors. Frightened about the Eurozone? Then buy US treasuries. Think the Eurozone problems are near resolution? Then sell the US Treasuries and buy something with a greater yield. The seesawing action that these swings produce and which will often take days to play out, has been very evident in a very short time span. Further uncertainty is almost inevitable and further volatility will follow.

I had an email yesterday from someone who, having read the Daily Currency Insight, said “None the wiser about the Long term” and having read the report back, I must admit I didn’t outline a long term projection. The reason is that with the two major UK and European stories still very unclear and mixed data coming from the US and elsewhere, long term planning is very much a lottery right now. Chart wise, the Pound ought to start to gain strength from here and it is in an uptrend against the Euro but perhaps a less obvious one against the US Dollar. Sterling is though at the very bottom end of its trading ranges against the likes of the Australian, New Zealand and Canadian Dollars at is as low as it has been against these three for roughly a quarter of a century. Logically, we should see a turnaround in the Pounds fortunes against these three as well but when their economies are so much more robust than the UK’s and their government debt is a mere fraction of Britain’s, there are no guarantees that the Pound will make headway any time soon. So short to medium term planning is the best you can do or you have to make a decision based on all the available evidence and remember not to kick yourself if hindsight proves you acted prematurely. Teh problem is that in order for us to get a lonmg term forecast right,we need politicians to do the right thing! I rest my case.

There have been other news stories though; a monthly Royal Institution of Chartered Surveyors survey released overnight showed a net balance of 17% of surveyors reported a rise in UK house prices in April compared to just 9% in March but the British Retail Consortium reported a fall in high street sales. So if people are getting more for their houses, they certainly are not spending it on the high streets. We also had a non event in the guise of the Bank of England interest rate decision. No change in rates or quantitative easing levels and no press conference meant their meeting barely registered on the markets. Today’s big data releases are the industrial production and manufacturing output numbers. The weaker Pound may have helped in both regards but Sterling is unlikely to react while the government decisions are still in abeyance.

And finally, as we in the West live in an age where shamelessness is no longer a sin but more likely a route to celebrity status, a lesson in decorum comes from China where a chap called Xiao Chen, 25, a was walking to a river in Chongqing for a late night swim but became entrapped in a boggy patch full of duckweed. He had his mobile phone with him but didn’t call for help because he was too embarrassed at being caught in this predicament. And even when rescuers got to him and asked him to remove his trousers so they could drag him out of the sucking mud, he refused because he would not like to be seen in his undergarments. A man with standards; a rare commodity these days.

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