Analysis

2nd July 2010

 

 

Sterling / Euro

 

The pound continued to fall sharply against the single currency yesterday, sliding another cent as funding concerns in the eurozone eased.

• The smooth passage of Spain's auction of €3.5 billion worth of five-year bonds alleviated concerns that the country is struggling to raise funds from the market. It also helped to downplay the negative signal on its credit rating, which Moody's had given the previous day.
• In the UK a report showing that UK manufacturing growth weakened in June gave the markets further impetus to sell the pound.
• In trading this morning, the pound has capped its losses, with the price now holding comfortably above 1.21.
• Although the ECB avoided massive disruption yesterday as eurozone banks repaid a record €442bn in emergency funds borrowed a year ago, there was still strong demand for shorter-term ECB liquidity, which points to significant strains in the financial system.
• We maintain a negative bias for the euro and see key short-term resistance for the currency at 1.21. Heading into next week we expect that sterling will resume its upward trend.

 

 

Sterling / US Dollar

 

The pound shot higher against a weaker dollar yesterday, pushing above $1.51 as investors used disappointing US data as a catalyst to sell the currency.

• Sterling jumped to an eight-week high, climbing over two cents following a raft of weaker-than-expected figures.
• Weak jobs, housing and manufacturing sector data put heavy selling pressure on the greenback, and sterling's gains accelerated after stop-losses were triggered above $1.50 and $1.5030.
• Where as in the past the dollar has always gained on negative data due to its safe haven appeal, the market at present is favouring the yen and Swiss franc as haven currencies. The dollar has fast lost favour this week, undermined by concerns about the strength of the US economy .
• The crucial figure today is the US non-farm employment numbers. The market expects a drop from Mays 431k increase. This is mostly due to an expected reduction in census workers, which has been skewing the data.
• A negative surprise from today's numbers could weigh further on the greenback sending sterling higher. At present the price is hovering around $1.5150.

 

 

Euro / US Dollar

 

The euro enjoyed its biggest one-day advance since mid-May against the US dollar yesterday, gaining three cents to close back above $1.25.

• The euro started its rally without any obvious stimulus, particularly as the single currency is normally so vulnerable when equities are on the slide.
• However, some relatively positive news from the eurozone regarding ECB loans and a Spanish bond auction did provide some support for the euro.
• The dollar extended losses after data showed business activity in the US manufacturing sector came in weaker-than-expected in June.
• A survey also showed a steep fall in pending home sales in the US, with the figure plunging 30% in May after a popular tax credit expired at the end of May.
• In trading this morning the euro has dipped slightly but the price is still hovering near $1.25.
• Looking ahead the risks for the euro remain apparent. Demand from eurozone banks for extra funding showed they are still hugely reliant on emergency cash. Tensions in the interbank market also remain strong, which is likely to keep the euro under pressure.

 

 

Rest of the World

 

Australian Dollar

 

The pound gained for the fourth consecutive day against the aussie yesterday, climbing a further two cents to hit a five-month high as equitiy prices continue to slide.

• Combined fears about the strength of the US, Chinese and broader global recovery at present are supporting risk adverse sentiment, sending higher risk assets tumbling.
• Equity prices throughout Europe, the US, and Asia are falling through the floor, giving investors the impetus to sell the aussie dollar.
• In trading this morning the aussie has capped its losses after Australia's government announced a watered down version of a proposed mining tax, easing concerns it could hurt business investment and share prices.
• Having briefly touched 1.80 yesterday, the price has come back down slightly but remains hovering above 1.79 with US employment data awaited.
• Looking ahead to next week the RBA rate decision is due and, although no change is expected this time around, there has been talk about a possible rate cut later this year under the current global economic conditions, which is weighing on the aussie.

 

 

New Zealand Dollar

 

Sterling maintained its upward trend against the kiwi yesterday, briefly touching a four month high with investors continuing to shy away from higher-yield currencies.

• The pound gained over a cent and a half as the negative global outlook continued to sour with poor economic figures from the USA adding to the risk adverse picture.
• Having briefly pushed over 2.21, sterling did par it gains in the later session and is trading just below 2.20 this morning.
• Investors now are awaiting US employment numbers to be released. Should the figures come in below market expectations, we can expect the kiwi to slide further with investors unwilling to take up risky positions especially ahead of a long-weekend in the US.
• This could see the pound head back above 2.20 going into next week.

 

 

 

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