FX Market Overview
This is a nervy time for Sterling and the UK economy. The government is paying a higher interest rate on borrowings which are linked to worryingly high inflation levels but tax receipts are being hit by lower employment, lower spending and a lack of stamp duty from a dead housing market. It would be really handy if we were to all drop dead now so they can rake in the inheritance tax. Sorry...too morbid? These effects were highlighted by yesterday’s government borrowing data which was rather mixed but generally bad news. Sterling had a slightly fraught day as a result; even a positive report from the Confederation of British Industry wasn’t enough to lift the gloom. The Pound may weaken further after this morning’s release of the minutes from the last Bank of England rate setting meeting. We know that interest rates and QE volumes were not changed but there is a feeling that rather than the 6-3 voting pattern at the previous meeting, at this meeting 7 of the 9 strong Monetary Policy Committee voted to keep interest rates on hold. If that is the case then the bond markets will delay their expectations of the first UK interest rate hike and the Pound is likely to fall.
The Euro is having an even more torrid time while Greece is still the word. Greek Prime Minster survived a vote of no confidence last night but there is still uncertainty over whether there is the political will in Greece to press ahead with sufficient austerity measures to placate the EU and International Monetary Fund. Unless Mr Papandreou can pull off this amazing feat, further funds will be hard to come by and Greece will be left to fend for itself. What am I saying; no they won’t. It would be hugely embarrassing for the EU which allowed Greece and others to cook the books sufficiently to meet the Maastricht criteria to then see one of those countries stumble out of the Euro through default. They won’t let that happen and the realisation of that situation within the financial markets starts to explain why the Euro hasn’t fallen through the floor during this bungled debacle. If the potential of a debt contagion isn’t enough to weaken the Euro then I doubt today’s EU consumer confidence figures or even a poor industrial orders report could weaken the shared currency.
The US Dollar will be in the spotlight today. We get the interest rate and financial stimulus decisions from the Federal Reserve this evening and all eyes will be on the press conference after the announcement of no change to either policy. That is less of a prediction than a foregone conclusion. It is unlikely the market reaction to this event will be substantial but we have to be wary in case the Fed Chairman, Ben Bernanke, springs any surprises or uses an imprudent phrase. Exchange rates can alter on such trivial matters.
The Canadian Dollar had a good day yesterday; retails sales were up slightly but an index of leading indicators was up more and that was enough to see the Canadian Dollar strengthen across the board. The Bank of Canada releases its financial review today so that could well be market moving for the loonie and most likely a strengthening factor.
Finally, a farmer who was banned from putting an advertising banner on his land has resorted to mobile advertising instead. He has painted the logo of his turf company on the sides of his sheep and lets then graze next to a main road. So if you are driving on the A1 in North Yorkshire and you see a flock of sheep with TYAS TURF sprayed on their flanks in sheep marker, don’t worry, you are not going mad.
