Weekly € rates and comments – week commencing 28th September 2009

Last week got off to a quiet start with the markets waiting for the minutes of the last Bank of England meeting which were released on Wednesday. The minutes contained no surprises. The committee members agreed as one to keep the level of quantitative easing at current levels [£175bn] and there was no mention of reducing the interest rates at which the BoE paid on deposits held with it by the banks. Then Mervyn King the Governor of the Bank of England seemed to indicate he welcomed a weak sterling as it would boost exports. One of the problems with this logic is that it assumes we have things we can export which given the state of UK industry makes me wonder. It also assumes that other countries want to or have the capability to buy our products which given the credit crunch is worldwide may be a wrong assumption. One theory that I have seen for the Governors need to undermine sterling is that it is one of the few controls he has at his disposal to hit the BoE's inflation target of 2% by increasing the cost of imports. This could well be the case but the problem is that once a currency starts to weaken it is very difficult for a central bank to stop the rot. Limited UK economic data out this week. During the week we have some housing data with Augusts mortgage approvals and Septembers house prices surveys from the Halifax and the Nationwide. On Thursday we have the purchasing managers index which is expected to show a slight improvement

 

The euro, which sits at €1.085/£1 inter bank, continues to be flavour of the week/month/year. Business confidence in Germany continued its upward trend albeit slightly below those predicted by the analysts. As Germany is a key driver of the euro zone economy this is positive for the euro zone. This weekend we had the German elections and Chancellor Angela Merkel improved her majority. Some market commentators are predicting the euro to approach parity with sterling by the year end [i.e. €1=£1] whereas some believe sterling to be undervalued against the euro and could be much higher by the year end. However sentiment at this moment in time is with the euro and as such I suspect the upside for sterling is limited with the parity having a higher probability. This week we have euro land unemployment data which is expected to increase to 9.6% but with a slowing rate of increase. The forecast is for 10% by year end. We also have inflation data which is expected to stick at -0.7%. Eurozone consumer confidence is expected to increase slightly but is in negative territory.

 

Weekly € rates and comments – week commencing 21st September 2009

Concerns regarding the health of the UK financial sector and the 'unconventional' monetary policy of the Bank of England re. quantitative easing continued to weigh heavily on sterling last week and  its value against all major currencies suffered. Mervyn King, Governor of the Bank of England (BoE), is approaching pantomime villain status, as far as sterling investors are concerned, as his ability to talk-down the UK economy and unwillingness to offer support to sterling's value continues to drain confidence and depreciate the pound. The 'double dip' recession that some economists have warned of seems to be materialising and the rally seen during the early summer months has proved to be something of a false dawn. A significant report from one of the major European banks published last week raised the possibility of the £/€ exchange rate approaching parity [£1=€1]  towards the end of the year, which was where we were at the start of the year. One positive is that the UK appears to be on course for a return to growth in the third quarter of this year. On Wednesday of this week we have the minutes of the Bank of England released which will be carefully analysed by the market, especially given the surprises contained in last months minutes.

 

 

The euro, which sits at €1.102/£1 inter bank, continued to advance against the ailing pound and continues to surge against the US$, as it has consistently done since March of this year. Flattered more by the depreciation of other currencies rather than by any particularly positive news in the Eurozone, the euro is in the ascendancy.. There seems to be little chance of seeing any increase in official interest rates from the European Central Bank but with few other central banks looking likely to raise rates either and the European equity market rising steadily the euro is likely to maintain its ascendancy for quite a while  This week we see euro zone data for both the services and manufacturing sectors which are expected to show the euro zone move into expansive territory in both these areas.

 

Weekly € rates and comments – week commencing 14th September 2009

Sterling had a better second half to last week following the Bank of England meeting on Thursday. The market was nervous following August's meeting when they were surprised by the BoE increasing their programme of quantitative easing by £50bn. This surprise was then compounded when the minutes of the meeting were released and it was noted that the Governor of the BoE had voted for a £75bn increase rather than £50bn. So when the BoE announcement was released Thursday lunchtime and there had been no change to UK interest rates and no increase in the quantitative easing programme, sterling regained lost ground. Strong UK industrial production figures released last Tuesday probably means that the UK economy expanded in the three months to the end of August, the first increase for over a year. This week we have the following UK data for August; inflation which is expected to show a reduction to 1.4%, unemployment which is expected to show an increase to 8% and UK retail sales which are expected to increase by 0.4%

 

The euro which sits at €1.139/£1 as I write has been the main beneficiary of the US$ weakness. The European Central Bank has been successful in maintaining liquidity and keeping interest rates low in an efficient manner by having a wide range of different funding mechanisms that are easy to access. This is in stark contracts to the UK and the programme of quantitative easing. Also the eurozone as a whole is emerging from recession with Germany seeming to lead the way with German industrial production data for July showing continued improvement. But these figures show an 18% fall over the prior year which just shows how big the hole is that has been dug and how it will take a long time to fill this spare capacity. This week we have a survey of German economic sentiment which is expected to show continued improvement being helped by an improvement in confidence in export-oriented sectors.

 

Weekly € rates and comments – week commencing 7th September 2009

Last week was a better week for sterling gaining against most currencies. There wasn't a whole lot of economic data out. The purchasing manager's index for manufacturing fell from the prior month whereas the same survey for the services sector was positive and expanding at a faster rate than forecast. These surveys together with improved business expectations and labour shedding beginning to slow has led to hopes rising that the UK economy could return to growth in the third quarter. But what of this week. The Bank of England hold their next meeting. The outcome from the last BoE meeting sent sterling into fast reverse and sterling ended up being the worse performing currency in August. The expectation is for interest rates to be kept on hold and no increase in the quantitative easing programme and hopefully we won't have any surprises. We also have UK industrial production for July released which are expected to show an improvement over the previous month but a fall of 10% over the prior year.

 

The euro sits at €1.142/£1 inter bank.. The European Central Bank met last week and kept euro interest rates on hold which was expected. The accompanying announcement by the ECB president highlighted that the eurozone faced a very gradual recovery and that it was too soon to even consider raising interest rates. This statement undermined the euro. Otherwise as previously reported the eurozone as a whole is emerging from recession with Germany seeming to lead the way with German industrial production data for July being released this week with the expectation being for an improvement on the June figures. But these figures will show an 18% fall over the prior year which just shows how big the hole is that has been dug and how it will take a long time to fill this spare capacity.

 

Weekly € rates and comments – week commencing 1st September 2009

Sterling, which has had a bad August, lost further ground last week as the fallout from the minutes of the Bank of England's (BoE) last meeting highlighting their intention to expand quantitive easing whatever the affect on sterling continued to rumble on. A very marginal improvement in UK GDP figures last Friday did nothing to support sterling having already lost roughly 4% against the euro and the US$ in the past 4 weeks. Given that the BoE are not due to meet again until the 10^th of September and very little significant UK data due out next week, sterling may well find itself in this lower trading range until there is a new development or perhaps a change of strategy from the BoE. However, amongst all this gloom the expectation for the UK to return to growth during quarter 3 of 2009 is positive and brave and unpopular decisions are often needed at times of crisis.

 

 

Confidence within the Eurozone is definitely on the up for having seen France and Germany leave recession by reports released in recent days. The euro sits at €1.139/£1 inter bank. Specific information last week regarding German inflation which was slightly better than expected helped the euro to extend the previous week's gains against sterling and close the week up against the US$ also. However, as with the UK and the US, inflation is expected to remain under the target of 2% and so any chance of seeing a hike in interest rates from the European Central Bank seems very unlikely before the end of the year. This week we have Eurozone unemployment figures and again it will be interesting to see how this lagging indicator is faring.