Analysis

08th June 2010

 

 

Sterling / Euro

 

Sterling hit a fresh 18-month high versus the euro as worries over structural problems in the eurozone continue to plague the single currency.

• There were reports yesterday of investors moving funds out of German bunds in favour of UK gilts amid concerns about the safety of the euro.
• The euro was also undermined after Hungary, the latest European country to declare fiscal problems, warned that its economy was in a "very grave situation" and that talk of a government default was "not an exaggeration".
• In the UK, sterling was given a slight boost as David Cameron reminded the public of the "painful times" that lie ahead for the country, laying the foundations for a strict round of spending cuts from the new administration.
• The new government's commitment to tackling the deficit problems, at present, come across as credible, which has been supportive for sterling.
• Over the longer term, as the fiscal measure impact on the strength of economic growth, the pound could suffer, but a present the markets have taken a positive view towards the government's effort to curb spending.
• In trading this morning, the price remains little changed. Having rallied so sharply in recent sessions, the pound has pared its gains holding above €1.21.
  

 

Sterling / US Dollar

 

Having rallied against the dollar during European trading, the pound tracked US equities lower in the afternoon, eventually closing just marginally higher.

• The pound enjoyed an early rally against the US currency as David Cameron prepared voters for the deepest spending cuts in a generation, increasing investor confidence his government will tackle a record budget deficit.
• Traders also said that continued market speculation that Prudential would have to buy back sterling following the collapse of its bid for AIG's Asian arm helped the pound maintain its bounce.
• In later trade though, sterling reverted back to its close tie with the equity markets losing ground steadily to the dollar as the US indices turned lower.
• In trading this morning, the pound has ticked higher edging back above $1.45, but the price remains vulnerable with risks to downside.

 

Euro / US Dollar

In a relatively quiet day between this pair, the euro eventually closed slightly lower despite an unexpected jump in German factory orders.

• In early trading, the euro fell below $1.19 for the first time in more than four years but it did recover most of its losses following some strong German manufacturing data, which encouraged investors to buy back the currency.
• The euro remained on the back foot though after a Hungarian official said last week that his country had only a slim chance of avoiding a Greek-style debt crisis.
• The euro has edged higher this morning, but is still near four-year lows with the price holding below $1.20. We do not expect this short squeeze to last and investors are likely to resume selling on persistent worries about Europe's financial system.
• Despite words from Ben Bernanke stating that European leaders are committed to ensuring the survival of the euro, traders are sceptical and the euro's downtrend remains firmly intact.
• In addition, investors have almost been given the all-clear to sell the currency with European politicians not appearing unduly worried about the recent drop in value, given the competitive advantages that it should provide.

 

 

Rest of the World

 

Australian Dollar

 

The pound continued to rally against the aussie yesterday, climbing a further three cents but it has eased off this morning following firming Asian equities.

• Despite another tumble in European and US shares, the Asian markets opened on a more positive note, which gave investors a chance to cover extreme short positions built up against the aussie in recent weeks.
• In terms of data, the focus this week will be Australia's latest unemployment figures due on Wednesday. The forecasts suggest another positive reading underscoring the improving health of the economy.
• However, at present we expect that the aussie's movements will continue to reflect the levels of risk appetite in the market. Whilst the currency is enjoying a rally this morning, the negativity surrounding the eurozone is likely to keep it under pressure.

 

 

New Zealand Dollar

 

Sterling climbed another four cents against the kiwi dollar yesterday with investors paring back expectations for a rate rise in New Zealand this week.

• The broader levels of risk aversion continue to hamper higher-yielding currencies, and the kiwi has come under increased pressure as investors pare back bets that RBNZ will raise the interest rate at their meeting on Wednesday.
• For some time, the market has been pricing in expectations of a move to 2.75% as economic conditions improve.
• However, the obvious global ramifications of the ongoing crisis in the eurozone may tempt the central bank to hold off raising rates in order to further solidify the recovery.A dovish tone from officials in the accompanying statement could also dampen demand for the currency.
• This morning, the pound has softened slightly, but remains trading above 2.19 at a three-month high.

 

 

 

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