Analysis

22nd June 2010

 

 

Sterling / Euro

 

This pair was again essentially treading water yesterday with investors holding station ahead of Osborne's Budget due today at 12:30.

• Market movement was relatively moderate with the only announcement of any real worth coming from ECB President Trichet who spoke of the need for "a quantum leap" in terms of fiscal surveillance.
• Speaking before the economic and monetary affairs committee, Trichet went as far as to say that eurozone states which fail to adhere to fiscal rules could even see their voting rights withdrawn.
• His comments, though poignant, had little impact on the markets with the price continuing to hold just below €1.20.
• As traders await the Budget, the price is hovering unchanged around the same level though we expect to see some volatility this afternoon as the market reacts to the policies outlined.
• Sterling's near term direction will depend to a large extent on how aggressive the fiscal tightening is seen to be. Any indications that the recovery might be snuffed out by too heavy a hand will inevitably take its toll on the pound.

 

 

Sterling / US Dollar

 

Having initially hit a 5-week high in early trading, sterling's run against the US dollar ran out of steam as caution crept in.

• Risk appetite got a boostyesterday following China's decision to de-peg its currency. Ahead of the G20 meeting this weekend, China took the decision to allow more flexibility in its currency movements, which sent the safe haven dollar lower across the board.
• Through the day though sterling steadily gave back its gains, dropping back below 1.48 as the market grew understandably cautious ahead of the new UK government's first Budget.
• For the pound, a relatively tight budget would likely reduce the risk premium on the currency. But this would be offset to a large extent by the monetary policy implications - the tighter fiscal policy is, the looser that monetary policy is likely to be.
• There was also added concern after former MPC member Blanchflower said yesterday that a double dip was a 'certainty' following the emergency Budget.
• Certainly Osborne has a thin line to tread to avoid strangling the recovery on the one hand whilst appeasing the market on the other. We expect to see the Chancellor strike a ratio of 80:20, spending cuts to tax increases.
• The price has dipped to 1.4750 this morning with equities slipping into negative territory, putting further pressure on the UK currency
  

 

Euro / US Dollar

The euro fell back over a cent from its one-month high hit early in the session, closing back at 1.23 against the US dollar as positive sentiment faded.

• The initial reaction to China's move was risk positive, pushing the greenback lower and boosting demand for riskier assets.
• The new flexibility given to the yuan operates both ways though and later in the session the yuan retreated from its early surge, prompting investors to pare back their riskier bets.
• Traders said that as China's move to remove its fixed peg may have been undertaken primarily for political purposes, the initial reaction was not followed-through.
• The Chinese decision proved a welcoming short-term distraction in the market, but the underlying European fiscal headaches and global growth uncertainties remain unaltered.
• A "sell the rally" mentality persists for the euro. There will need to be brighter signals from the eurozone bond market for the euro's recovery to prove sustainable.
• At present the euro is holding virtually unchanged on the day just above 1.23.

 

Rest of the World

 

Australian Dollar

 

The Australian dollar was a clear top performer yesterday following the news from China, rallying near two cents against the pound.

• In allowing more flexibility in the yuan's fixed exchange rate, optimism for the global economic recovery received a boost, strengthening higher-risk currencies.
• Sterling's sharp decline has slowed considerably this morning though as the stronger yuan spot level that was set staggered back lower later in the day.
• Although the Chinese authorities will resume a managed float of the yuan against a basket of currencies, it is still far from being fully floated and strong appreciation for the currency remains unlikely.
• In the past when the Chinese have appreciated their currency, the aussie dollar has given back its gains over the following few days.
• This morning the pound is slightly lower with the price now below 1.68, but through the week we could see sterling steadily recover its losses.

 

New Zealand Dollar

 

It was another decline for the pound against the kiwi dollar yesterday as a boost in risk sentiment strengthened demand for the higher-risk currency.

• The pound fell over a cent lower as China's move sparked a rise in higher-yielding assets.
• Given China's huge demand for raw materials, the move was seen as spurring a worldwide rise in commodity and oil prices.
• Much like other risky currencies, the kiwi has slowed its gains this morning, but sentiment toward the New Zealand currency remains positive.
• Markets are looking ahead to a couple of key figures from New Zealand this week, with expectations for the annual balance of payments deficit falling to 2.7% of GDP and for the economy to have grown by 0.6% on the previous quarter.

 

 

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