Analysis

23rd June 2010

 

 

Sterling / Euro

 

The pound broke back above €1.20 yesterday, gaining over a cent as George Osborne delivered a credible path to restoring public finances.

• The initial reaction to the Budget has been positive for sterling, with the market decreeing that the policies were tough enough to address the fiscal problems and keep the ratings agencies from downgrading the UK's sovereign debt.
• Although it may be sometime before the market has a real sense of the potential impact on economic growth, the Budget does seem to have appeased the markets whilst refraining from dropping the axe down too heavily.
• Osborne's cuts were perhaps not as aggressive as many had feared (and indeed as the Coalition had geared us up to believe). In particular the bank levy, in only generating £2 billion, was less drastic than expected.
• In trading this morning, sterling is continuing to climb though at a steadier pace. The pound has now crept to €1.21 and we expect to that it could have further to appreciate over the short term.
• The minutes from the latest MPC meeting are due to be released today though we don't expect them to reveal anything new with all policymakers likely to have agreed to keep rates and QE on hold.

 

Sterling / US Dollar

 

The pound resumed its upward trend against the US dollar, pushing back over $1.48 following an assertive emergency budget.

• The market took a positive view of George Osborne's efforts yesterday, with the Chancellor appearing to find the balance between the need for stringent spending cuts whilst refraining from putting a stranglehold on the recovery (although Harriet Harman may disagree).
• The market though still has to analyse the wealth of information delivered and determine what impact on the recovery the spending cuts and tax increases could have over the longer term.
• Fears for potential economic growth are still likely to rear up and could hamper the pound's movement.
• In addition, the global economic recovery remains fragile and with renewed fears about the situation in Europe, the dollar is likely to remain in high demand, keeping a lid on sterling's upward trend .
• This morning, the pound has moved a further half cent higher heading toward 1.49, but there are strong resistance levels at that point and we expect that this near term optimism may fade.
• The Fed are due to deliver their interest rate statement this evening and though the base rate will remain unchanged any dovish comments from Bernanke could put the dollar back on top.
  

 

Euro / US Dollar

The euro lost ground to the US dollar yesterday, dropping back below $1.23 with the risk rally running out of steam.

• The single currency remains vulnerable and with fears over the eurozone's banking system returning to the fore, the outlook for the euro looks downbeat.
• Risk aversion is back on the rise with European equities ending their rally yesterday, followed by a drop in US and Asian equity prices and the direction remains unchanged this morning.
• Worries were exacerbated after French bank Credit Agricole pushed back profit targets for its struggling Greek unit.
• A ratings downgrade of French bank BNP Paribas by Fitch and S&P's announcement that it had raised estimates for loan losses for Spain's banking sector are also likely to weigh on the euro.
• At present the rate remains hovering just below $1.23, but we expect to see the price turn lower in the near term and a drop back below $1.20 does not appear too far off.

 

Rest of the World

 

Australian Dollar

 

In line with its broader gains, sterling pushed over a percent higher against the aussie yesterday as the boost from the yuan's de-pegging began to fade.

• As with other higher-risk currencies, the aussie was on the defensive as the optimism generated by China's new flexible currency regime faded and investors grew cautious about piling into risk trades.
• The positive reaction to the managed float by China seems to have run its course and it would appear that investors are returning their attention towards the general health of the global economy and the pressing problems in the eurozone.
• In trading this morning sterling is continuing to edge higher with the price now back above 1.70 with the Asian markets turning lower, taking their cue from weaker US stocks.
• With little economic news out of Australia, we expect to see the price steadily appreciate with risk aversion gathering momentum.

 

 

New Zealand Dollar

 

The pound ended five straight days of losses against the kiwi as the UK budget and risk adverse markets drove the pound up two cents.

• The kiwi ended its recent rally after the initial excitement about China's new currency policy faded and as the UK Budget improved sentiment toward the pound.
• In trading this morning riskier assets have come under renewed pressure following a drop in the Asian markets, with the Nikkei dropping near 2%.
• However, the kiwi dollar is holding firm with strong current account data offsetting the rise in risk aversion. The figure showed the country's annual deficit narrowed to its smallest in nearly 21 years, as exports rose.
• This evening New Zealand's first quarter GDP figure is also expected to show a strong figure, reinforcing the positive sentiment toward the kiwi potentially capping sterling's gains.
• At present the price is holding just above 2.10.

 

 

 

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