Sterling remains buoyant - for how long though? BoE Quarterly bulletin to confirm no more QE for now
Friday, 12 June 2009
Today's Highlights
Sterling remains buoyant - for how long though? BoE Quarterly bulletin to confirm no more QE for now
FX Market Overview
Sterling maintained its positive tone yesterday as encouraging data permeated the markets. US retail sales were up, US weekly jobless claims fell and the sun was shining. Why not buy Sterling then. Certainly the Bank of England’s inflation expectation report suggested prices would start to rise again before the end of 2009 and that was a fairly supportive story for Sterling alongside the improvement in mortgage lending figures. However, and I don’t want to be all ‘Bah Humbug’ about it but this Sterling strength; far from being a vote of confidence in the Pound is almost a default improvement based on a far more generalised upturn in confidence.
I would therefore urge caution before getting all Buzz Lightyear about the Pound. It is probably not heading for ‘infinity and beyond’ just yet. Investors are very adept at forgetting the fundamentals when the rose tinted specs are on and the UK still has an obscene amount of debt, is having its manufacturing base hammered by the global slowdown and the financial services sector is still not out of the woods. Alistair Darling spoke today of seeing shoots of recovery but those will be green shoots growing on the compost of a massive debt pile. So whilst this is a sunny day and making hay is de rigueur, the dark clouds of government debt are still rumbling along on the horizon and may come back to pour on our parade if we are not wary. Quick hay making may be the order of the day.
For the back ground to Sterling strength we have to look at the reasons for US Dollar weakness and the spotlight falls firmly on risk appetite returning, concern over the US fiscal deficit and much more attractive places to invest your funds than the US where interest rates are virtually nonexistent.
Many analysts point to the G8 meeting as being a crucial event that may change perceptions towards the US Dollar but G8 meetings are rarely that. More often they are platforms for a bit of grandstanding and limp communiqués so I don’t expect anything substantive to come from this latest meeting. Today’s US consumer sentiment index may be enlightening, especially if it reflects the upbeat tone of the retail sales data. This morning’s Bank of England Quarterly Inflation Report should suggest that no more Quantitative Easing is required and that may be good for the Pound and then the weekend looms large. Friday’s are often the day when traders will consider the profits they have made on the week and close their books to consolidate that profit. If they do so in a week when Sterling has rallied, the Euro has weakened and the US Dollar has done likewise, then we could well see a significant shuffle in exchange rate s in the latter part of London trading hours.
Away from these three main currencies, the Pound is less successful against the Australian or New Zealand Dollars. These are both offering relatively attractive interest rates and therefore will inevitably gain buyers when risk is en vogue. The South African Rand is a little more convoluted with high interest rates but a higher perceived risk as well. And even though commodities are rebounding, the demand for gold will decline as risk appetite increases. The Canadian Dollar is also a little mixed; it is dragged along by its major export market, The US of A nut as oil prices seem to be consolidating at better levels, it is susceptible to a bout of Canadian Dollar strength amidst the USD turmoil.
I guess, in short, the future isn’t so bright that you need to wear shades just yet but there are signs that better times may well be ahead. All I would warn against is being enveloped in the ‘nothing could go wrong now’ mood and getting caught when things correct to more sustainable levels.
And while you are passing me off as a grumpy old beggar, I hope you have a great weekend; the weather forecast for the UK looks promising and there is more sport to view than you could shake any number of sticks at. All I need is a cold beer or two and my weekend will be flawless. I hope yours is likewise.
I would therefore urge caution before getting all Buzz Lightyear about the Pound. It is probably not heading for ‘infinity and beyond’ just yet. Investors are very adept at forgetting the fundamentals when the rose tinted specs are on and the UK still has an obscene amount of debt, is having its manufacturing base hammered by the global slowdown and the financial services sector is still not out of the woods. Alistair Darling spoke today of seeing shoots of recovery but those will be green shoots growing on the compost of a massive debt pile. So whilst this is a sunny day and making hay is de rigueur, the dark clouds of government debt are still rumbling along on the horizon and may come back to pour on our parade if we are not wary. Quick hay making may be the order of the day.
For the back ground to Sterling strength we have to look at the reasons for US Dollar weakness and the spotlight falls firmly on risk appetite returning, concern over the US fiscal deficit and much more attractive places to invest your funds than the US where interest rates are virtually nonexistent.
Many analysts point to the G8 meeting as being a crucial event that may change perceptions towards the US Dollar but G8 meetings are rarely that. More often they are platforms for a bit of grandstanding and limp communiqués so I don’t expect anything substantive to come from this latest meeting. Today’s US consumer sentiment index may be enlightening, especially if it reflects the upbeat tone of the retail sales data. This morning’s Bank of England Quarterly Inflation Report should suggest that no more Quantitative Easing is required and that may be good for the Pound and then the weekend looms large. Friday’s are often the day when traders will consider the profits they have made on the week and close their books to consolidate that profit. If they do so in a week when Sterling has rallied, the Euro has weakened and the US Dollar has done likewise, then we could well see a significant shuffle in exchange rate s in the latter part of London trading hours.
Away from these three main currencies, the Pound is less successful against the Australian or New Zealand Dollars. These are both offering relatively attractive interest rates and therefore will inevitably gain buyers when risk is en vogue. The South African Rand is a little more convoluted with high interest rates but a higher perceived risk as well. And even though commodities are rebounding, the demand for gold will decline as risk appetite increases. The Canadian Dollar is also a little mixed; it is dragged along by its major export market, The US of A nut as oil prices seem to be consolidating at better levels, it is susceptible to a bout of Canadian Dollar strength amidst the USD turmoil.
I guess, in short, the future isn’t so bright that you need to wear shades just yet but there are signs that better times may well be ahead. All I would warn against is being enveloped in the ‘nothing could go wrong now’ mood and getting caught when things correct to more sustainable levels.
And while you are passing me off as a grumpy old beggar, I hope you have a great weekend; the weather forecast for the UK looks promising and there is more sport to view than you could shake any number of sticks at. All I need is a cold beer or two and my weekend will be flawless. I hope yours is likewise.
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