Analysis

21st June 2010

 

 

Sterling / Euro

 

Friday was another non-event between this pair with neither currency able to gain an advantage and investors waiting on the side-lines ahead of the Budget announcement.

• The only data of significance at the end of last week was the UK's latest public sector net borrowing figure. The number did come in slightly lower than expected in May, which gave sterling an early boost.
• It also continued the recent run of slightly improved news on the fiscal position, but the UK currency was unable to sustain its gains, capping them in later trade with the Budget in focus.
• In trading this morning the pair remains in a tight range with the price still lingering just below 1.20.
• The market is light on data today and we expect little movement with investors unwilling to place positions ahead of the Chancellor's announcement tomorrow.
• There are concerns that the extent of the spending cuts could have a deteriorating effect on the UK's economic growth, weakening demand for the currency.
• We expect though, that following some initial volatility sterling should find support with the market taking a positive view of the government's attempt to manage the deficit.

 

 

Sterling / US Dollar

 

The pound failed to take advantage of some positive figures on Friday, but is continuing to head higher against the US dollar this morning.

• Sterling held around its one-month high at the end of last week as the positive effects of better UK borrowing figures and improved risk tolerance fizzled out, with traders sounding caution ahead of the round of fiscal cuts.
• With a tight Budget likely to keep the rate hike pressure off the Bank of England in anything other than the very long term, sterling's steady outperformance could become over-stretched.
• Today however the pound has resumed its upward trend and is currently trading a further half cent higher with the price nearing 1.49.
• The US dollar's weakness comes after China broke away from its 23-month old currency peg.
• Having severed the peg, the yuan rose around 0.4% helping to reinforce market optimism that a pledge from China on yuan flexibility would help reduce the global imbalance.
  

 

Euro / US Dollar

As with many of the major currency pairs on Friday there was little movement here with the price remaining little changed around 1.24

• The euro held near a 3-week high against the dollar achieving its biggest weekly gain in more than a year largely as a result of Spain's bond auctions, which eased worries about the European debt crisis.
• Further confidence was built around announcements from both Spain and the wider EU to release stress tests of European banking institutions, boosting confidence in the global financial system.
• In trading this morning the euro has jumped higher after China allowed the yuan to rise to a post-revaluation high.
• In allowing the currency to appreciate the market is hoping that the global trade imbalance may begin to correct itself, improving the outlook for the economic recovery.
• In data this week, the key US event of the week will be Wednesday's Federal Open Market Committee meeting on Wednesday, but it could turn into something of a non-event with only marginal changes in the statement likely.

 

Rest of the World

 

Australian Dollar

 

The pound turned lower again the aussie dollar on Friday as improving market sentiment encouraged investors into higher-yielding currencies and the trend remains intact today.

• China's decision to revalue the yuan is an encouraging move for sustained global growth and has proved supportive for higher-yielding and riskier assets.
• The new flexibility on the currency should help to ease trade tensions and underpin demand for resource exports, giving a timely boost to the recent improvement in global sentiment.
• It remains to be seen how far the Chinese central bank will allow the yuan to appreciate, but this initial step has provided a broad boost for commodity-linked currencies.
• In the wake of the news the aussie has rallied strongly, with the pound over a cent lower this morning and the price knocked back down to 1.68.

 

 

New Zealand Dollar

 

Friday marked the fourth straight day of losses for sterling against the kiwi dollar and the trend is heading in the same direction this morning.

• Sterling has dropped back to 2.08 today with the news from China providing the impetus to buy the riskier kiwi.
• The strong Chinese currency should enable China to cope better with rising commodity prices, a potential positive for New Zealand's resource exports.
• The move to revalue may also have been designed to reduce friction at the G20 meeting on June 26 th where the yuan's value had been seen as a potential point of conflict, which has also helped to ease risk aversion.
• Following China's decision to remove their firm currency peg to the US dollar and with the global markets already in a more positive mind set, the kiwi dollar could have further to appreciate over the near term.

 

 

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