Articles from March 2010



Sterling continues it’s good run

A very good morning for Sterling this morning as the Pound hits a one month high against the euro to 1.1268 and it is also up to 1.5150 against the US Dollar.

The reason for the move higher has been attributed to the upward revision in 2009 Q4 GDP to 0.4% from 0.3%. However I feel there is a certain amount of profit taking after the dumping of Sterling in the last few weeks- the FT yesterday highlighted that hedge funds were shorting sterling and we are now probably seeing profit taking from this leading to a squeeze higher.

The gains in Sterling come despite the fact that consumer confidence for the UK in March fell by one point to -15 after two consecutive months of improvement. The dip in confidence has been blamed on intense media focus on the state of the UK’s finances and the increasing likelihood of a minority government.

Sterling will also have edged higher against the euro following data showing that Eurozone unemployment hit 10% in February- the highest since data started! More doom and gloom for the euro which is struggling to get above 1.35 and could face more downside pressure.

Sterling pushes higher whilst euro languishes

The Greeks  took advantage of the perceived improvement in the fiscal position by tapping the debt market with a 7 year bond issue.

The Greeks managing to sell sufficient to satisfy their April requirement but only achieving a 1.2 times cover ratio despite having to pay above expectations.

The gains seen in the Euro since Friday’s EC Summit agreement appear overdone now and with Eurozone economic recovery looking still very much 2-speed, the downside for the currency does look more attractive.

All the major currencies experienced positive data yesterday but it was the commodity currencies, and especially the Aussie $, that stole a march on the rest. The Aussie Dollar appreciated after an unprecedented appearance by the Reserve Bank Governor, Stevens on morning TV yesterday that has boosted speculation of a rate hike next week.

Stevens was appealing directly to the public to pull back demand for housing, and warning of further rate hikes. You can’t get a clearer message than that. Accordingly, the odds of a 25bp April hike have lifted from 50% to 62%, up from less than 25% in the first days after the March hike.

Once again we are in buy Aussie, wear diamonds territory as a widening of interest differentials and economic growth prospects make it difficult to argue against being long on the Australian Dollar.

Euro given a short term lift

Last week the big news was the agreement of a Franco German proposal involving the IMF to help Greece has lifted the euro in the short term, but it’s a nail in the coffin for the currency in the longer term.

Although the bailout was welcomed by the financial markets, the news of the IMF’s involvement was not good for the euro.

What we are seeing at the moment is a relief rally, with the euro being bought on the fact that a proposal has finally been agreed, rather than on the specific details it contains.

The financial aid proposed is limited by the need for unanimous decisions by euro member states, on the basis of assessments carried out by the European commission and the European Central Bank. This means the financial markets will remain cautious about the euros prospects until they see evidence of the system working in practice.

For the UK we have seen mortgage lending numbers come in better than expected at 2.1bln against the forecast of 1.8bln. This has helped the Pound nudge higher against the USD towards 1.50 again- the rate is also pushing higher on the back of improved market sentiment following the EU summit.

The Financial Times’s front page has reported that various hedge funds have profited heavily on selling Sterling recently. This could leave the door open for some profit taking on the upside to re-test 1.52.

Eu agrees rescue package for Greece

Finally we have an official deal on Greece so surely we have seen a surge of confidence in the markets and a rally in the euro- err not quite.

The package will be for about Euro 30 billion with about 1/3rd coming from the IMF and the rest in the form of bilateral loans from the other 15 Euro zone members. Although the euro has bounced higher it has so far been a deflated bounce up against the US Dollar from 1.3270 last night to 1.3385.

The agreement was welcomed after weeks of debate and wrangling, however news of IMF involvement was not considered good news for the euro especially after ECB President Trichet commented that IMF involvement would be “very, very bad”.

Greece will be aided on a fall back basis in the event that Greece cannot get suitable financing from the markets; however for assistance to be ratified it will require a unanimous decision from EU members after strong conditions have been met.

Thus we still have the potential for red tape and dispute when Greece would need direct assistance- this uncertainty could yet serve to undermine the euro further.

There was also a letter in the Financial Times from five eminent german professors who are threatening legal action. The result of which may be that either Germany or Greece leaves the eurozone. Methinks there will only be one result.

Darling’s budget announcements bring no surprises

A largely political budget failed to rattle the financial markets and the Pound was unmoved on the back of the budget- although it did slip against the US Dollar due to other factors.

It was announced that there would be a reduction in the government borrowing requirements but it was not enough to shift sterling especially as no clarity was divulged on how exactly the deficit would be reduced. Sterling did slip against the US Dollar following jittery trading on the downgrade of Portugal and the ongoing back and forth with Greece and the EU which led to USD buying.

This morning the Pound has staged a recovery following much better than expected retail sales data from the UK at +2.1% month on month; currently we sit at 1.4950 on the USD and 1.12 against the euro.

The euro was the big mover in the currency markets yesterday- on the downside.

There is hope of an agreement for Greece in the next couple of days from the EU summit but until this is definitive the euro will be under pressure.

Interestingly the PBOC (Public Bank Of China) have commented that the Greece debt crisis is just the beginning for the Euro zone- not good news for the euro and this could encourage longer term holders of the single currency to start dumping it and thus forcing it lower still.

Darling’s budget takes center stage

Today is finally the pre election budget day which Alistair Darling will unveil to the House of Commons this afternoon.

So what can we expect from Mr Darling today? Will he be specific and open about how the government plan to reduce the deficit by half within 4 years? Very unlikely…today is the last chance saloon for Labour to dance around the realities and focus upon trying to get re-elected.

Expect to see bashing of financial institutions and for Darling to drum home the point that early cuts or the Conservative policy could spin the economy back into recession. One item that would help this argument and sterling is the expectation of the announcement that the government borrowing forecasts are expected to be revised down from the record £178 billion.

Depending on how much it is revised down will be key for sterling. I would expect to see the budget on this basis to be slightly sterling positive as the financial markets do not expect clear plans on reducing the deficit- the post election budget will be much more relevant for this regard.

Today we have seen the euro trip through to an May 2009 low at 1.3340 against the US Dollar. The catalyst was again uncertainty with Greece coupled with news that Fitch has downgraded Portugal’s long term default rating from AA to AA-, with outlook negative.

The Swiss Franc has hit new all time highs against the euro and currently sits in the low 1.42’s. With imminent intervention not likely we could see further CHF gains.

Wise Money investors sit on their hands waiting for the budget

Not a great deal of movement in the money markets- the Pound is currently just under the 1.50 level and a touch over 1.11 against the euro.

The Pound has lost about a cent against the US Dollar in early trading as the markets remain nervous on the budget outcome. In addition the pound is a little softer in relation to UK inflation falling (although very slightly) for the first time since September- the fall will be welcomed by the BoE who predicted lower inflation for the second half of 2010.

However the rate which now sits at +3.0% year on year is still a full 1 per cent above the target level of 2%, the pound is lower as falling inflation could lead to further Quantitative Easing in the future.

The euro also remains flat and is just below the key 1.35 level against the USD with any upward potential tempered by the Greece fallout. The Greek PM stated that he will not be going to the EU summit as a beggar and also that he expects a positive outcome from the summit.

The Greek deputy PM then threw in his spanner by stating that if financial aid was not forthcoming from the EU, then it questions the concept of the Eurozone as a whole.

The Swiss Franc is still gathering strength in the markets especially against the euro- hitting all time highs in the low 1.43’s.

Swiss National Bank chairman Hildebrand has been discussing the Swiss economy and the strength of the Franc. He has stated that the SNB has means to fight the excessive Franc rise and that it can buy very large quantities of foreign currency. Therefore this is one to watch for intervention in the near future to weaken the Franc.

Labour’s last budget the main focus for Sterling this week

The UK’s attention is very much centred on Wednesday’s budget statement from Alistair Darling – very likely to be his last even if the Labour government are somehow returned to power.

The press is full of helpful advice for the Chancellor, mostly telling him what NOT to do, and there is so much of this that the statement itself might well set a record for brevity.

He is assumed to have the ‘good news’ to tell of a reduction in estimates for the UK’s borrowing requirement for this year and the next few years to come and will probably upgrade his growth estimates on the back of last quarter’s GDP figure and the predicted estimate for this quarter’s number.

Which could be Sterling positive in the short spell on or around delivery but the cloudy outlook for the whole political situation at present is more likely to leave investors wary and hence leave the currency vulnerable.

Today sees the opening of the European Parliament’s Committee on Economic and Monetary Affairs, primarily to discuss the Greek economy, the effect the current crisis is having upon the wider Eurozone region and possible solutions to solve said problems.

Though the eu being the eu, whether anything concrete will actually be delivered is unlikely.

Greece lightening strikes again and weighs down on the euro

The German taxpayers don’t fancy the prospect of picking up the tab for Greece’s rescue package.

This provoked comment from Chancellor Merkel that mirrored those of her Finance Minister earlier in the week which in effect dismissed chances of a monetary rescue package from within the Community, instead directing the Greeks to the IMF.

The Greek prime Minister took up the challenge, complaining about the delay in any progress and apparently resolved to the fact that Eurozone cash was not on the table. He told the European Parliament that his country was running out of patience and that in fact Greece was already subject to a ‘full IMF austerity regime’ but without benefiting from any of the IMF related advantages i.e. reduced cost of funding.

He said that savings that they were achieving through the strict cost cutting measures, rather than going to reduce their budget deficit, were finding their way into the pockets of bond-holders through spiralling interest rate costs. As if to back up his argument, Greek 10-year bond yields yesterday spiked again, up by 17 basis points to 6.26% – this as opposed to the 3.15% yield currently seen in the German equivalent.

On the back of the wrangling, the Euro dropped by a couple of cents against the Dollar.

To Wise Money it looks as though the Euro still has further to go with the attempts to project unity amongst the Euro zone members dissipating by the day. Next week’s EU summit meeting is assuming evermore importance given that the immediate future for the Euro itself could depend upon what emerges.

Sterling holds onto it’s currency gains

The Pound has so far held onto yesterdays gains following the unexpected fall in the unemployment claimant count.

The market welcomed the data along with the unanimous decision from the Bank of England to hold on QE. If you look at the employment numbers more closely the headline figure shrouds weak underlying trends in the labour market- however this was ignored for now by the markets and the news provided a rare opportunity to buy the pound.

Already today we have seen the dreaded Public sector net borrowing data come and go without any nasty surprises- the data was actually better than expected with PSNB at 12.361 bln against the forecasted rise to 14.75 bln for February.

In other data mortgage approvals for the UK sunk to 48k identifying further sluggish lending in the housing sector. The pound seems nicely consolidated above 1.52 and 1.11, however it is unlikely to see further big moves now until next weeks budget.

In other news the Canadian dollar is still on its drive to parity against the US Dollar and is currently within one cent of achieving this. The Canadian government are playing down the strength of the Canadian Dollar for now but there must be a real concern for Canadian companies who rely on exporting.

Although the Bank of Canada have repeatedly expressed concern in the past on the strength of the CAD the recent improvement in economic sentiment is unlikely to lead to any firm action or comments on the currency for now.