Analysis

09th June 2010

 

 

Sterling / Euro

 

After climbing for three consecutive days, the pound lost ground to the euro yesterday as investors reacted to a comment from one of the prominent rating agencies.

• The pound fell sharply during the European session after Fitch brought the UK's deficit back into focus, warning that Britain faces a "formidable" challenge to cut government borrowing.
• The ratings agency said the UK needed more ambitious plans than the previous government set out in its April 2010 budget to tackle a budget deficit running at around 11% of national output.
• However, the comments offered little new information and really just served as a reminder of Britain's troubled financial situation. It gave investors the opportunity to cash profits on the pound's recent rally.
• Late on in the session, sterling began to bounce back, with its sharp fall that briefly took it below 1.20 probably slightly over done.
• In trading this morning sterling is continuing to edge back higher with the market price just below 1.21.
• Again there is little data out today and with both the ECB and BoE due to announce their latest interest rate policy tomorrow, we expect that trading could be relatively quiet.
  
  

 

Sterling / US Dollar

 

Having fallen to a near two-week low against the dollar following some negative comments, sterling recovered over a cent to close level on the day.

• The pound came under broad pressure yesterday in the wake of comments from Fitch that reiterated the poor state of Britain's public finances, putting the UK's substantial budget deficit back in the spotlight.
• The comments reignited market concerns about the safety of the UK's top-notch AAA rating, pushing sterling briefly to a 13-day low versus the dollar and triggering sell orders as the pound went below $1.44.
• The statement did not do much to alter the existing picture though, and sterling recovered during the US session, helped on by some relatively positive comments from Ben Bernanke about the global economy.
• This morning the pair is holding relatively flat, hovering just below 1.45. Neither currency in the past few days has been able find any lasting direction, but we remain of the opinion that given the dollar's broad strength, sterling could have further to fall in the short term.
  
  

 

Euro / US Dollar

The euro edged up yesterday, as investors booked profits a day after the currency hit its lowest level against the dollar since early 2006.

• Analysts said the single currency gained some support after eurozone ministers made final arrangements on Monday to set up funds for countries facing problems servicing their debt.
• Euro gains were slight though, with the market remaining anxious about rising debt levels in several eurozone countries and their potential inability to raise the necessary funds.
• Portugal, Italy and Spain are set to sell new bonds this week - the first sale for Spain since its credit rating downgrade - and investors are justifiably wary of overexposure to the single currency, keeping the price capped below $1.20.
• The focus now is turning to the ECB and what it can do to shore up sentiment. Trichet talks later in the day ahead of an ECB meeting tomorrow that the market will watch closely for any steps taken to ease strains on the eurozone economy.

 

 

Rest of the World

 

Australian Dollar

 

In line with its broader market movements yesterday, sterling lid sharply against the Australian dollar, but the aussie has pared its gains this morning on lower Asian equities.

• With British credit worries back in focus, the pound slid nearly four cents. Losses were exacerbated as investors covered their short positions on the aussie dollar, huge amounts of which have been built up in light of the recent problems in Europe.
• In trading this morning sterling has stemmed its losses, and has recovered back over 1.75 as the Nikkei closed over a percent down.
• The aussie has also been weighed down following some cautious comments from RBA Governor Glenn Stevens which, combined with weaker housing data for April, has reinforced expectations that interest rates will remain at 4.50% for some time.
• With no major economic news due today, focus is on tomorrow morning's unemployment figures from Australia, which will give a good gauge of how the Australian economic recovery is progressing.

 

 

New Zealand Dollar

 

The New Zealand dollar was up significantly yesterday as short covering and a rise in risk appetite helped propel the kiwi up nearly three cents against the pound.

• The kiwi gained notably on Tuesday as investors made movements towards a more pro-risk trading strategy. This was helped by statements from Fed Chairman Ben Bernanke's assessment that the US will not lose its momentum and fall back into recession due to the current global economic worries.
• In trading this morning though, sterling has recouped some of its losses, with the price now back above 2.17 following lower Asian equity markets.
• Investors are also cautious of holding kiwi assets ahead of the RBNZ decision on interest rates due later tonight. The forecast is still for a 0.25% rise but there are growing worries that the European debt crisis may stay the central bank's hand.

 

 

 

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