Analysis

29th June 2010

 

 

Sterling / Euro

 

Sterling reached a 19-month high against the euro yesterday on speculation that eurozone debt problems would leave the region fiscally weaker than the UK.

• After a quiet morning, the pound began to gain traction as focus returned to the funding problems of certain European countries.
• Financial markets will closely watch debt auctions by France and Spain later this week following a tepid response to Italy's sale of €7 billion worth of government bonds yesterday.
• European banks are also due to repay €442 billion to the ECB on Thursday, raising questions about liquidity and putting pressure on the single currency.
• The pound received a further boost, extending gains after Bank of England policymaker Andrew Sentance said that the drastic tax hikes and spending cuts outlined in the new coalition government's budget last week would not remove the need to start raising interest rates.
• Having touched €1.23, the pound is continuing to edge higher in trading this morning.
• It is another fairly quiet day on the economic calendar with the key releases in the UK being mortgage lending and mortgage approvals

 

 

Sterling / US Dollar

 

Sterling continued to rally against the US dollar yesterday, moving to a seven-week high just above $1.51 though the price has dropped back below that level this morning.

• The pound gained support following further bullish comments from BoE member A. Sentance, who voted in favour of an interest rate rise this month.
• He said that the fiscal plans were much as expected and did not change his view that it was time to start gradually withdrawing the stimulus measures in place.
• Although at present he is only a sole voice within the Monetary Policy Committee in calling for rates to be raised, it marks a more bullish stance than seen from either the ECB or Fed, which has been positive for the UK currency.
• Sterling's gains have been capped today though as some investors are wary of taking the pound too high, reckoning that the UK currency's rally on the back of last week's drastic emergency budget may have gone too far.
• A present the price has dropped back near $1.50 and a definitive breach of this level is needed for the rally to continue.
• Looking ahead, the next major announcement for this pair, and indeed the currency markets as a whole will be US non-farm payrolls due on Friday, which should add more clarity on the state of the US economy.

 

 

Euro / US Dollar

 

The euro fell broadly yesterday, losing nearly a cent to the US dollar as potential funding tensions in Europe this week weighed on demand.

• After a relatively quiet opening to the weak, which saw the currency markets virtually unchanged, investors began to sell the euro as the market refocused its attention on the eurozone funding trouble.
• There is added caution at present as European banks are due to repay €442 billion to the ECB on Thursday, which could leave a potential liquidity shortfall in the financial system.
• The euro's downward trend remains intact this morning with the price now heading back down toward 1.22.
• Of note, the euro has also hit a record low against the Swiss franc following the Swiss National Bank's recent announcement that they would not intervene in the market to control the strength of their currency.
• We expect that the euro does have further to fall, though the market is still watching for month and quarter end flows, which could cause some short term volatility.

 

Rest of the World

 

Australian Dollar

 

The pound resumed its upward trend against the Australian dollar yesterday, gaining over a cent on the back of risk adverse markets. .

• Sentiment toward riskier currencies took a knock on renewed concerns about the eurozone's banking sector and funding pressures in the region's money markets.
• Another fall in Asian stocks overnight also prompted investors to sell the aussie enabling sterling to gain a further percent this morning with the price now at 1.75.
• Weaker equities are continuing to set the theme, and with few obvious catalysts to shake the slump, we expect the pound to head higher over the short term.
• The aussie's fall against the US currency is also helping to push sterling higher after stop losses were triggered, which exacerbated selling of the aussie dollar.

 

 

New Zealand Dollar

 

Sterling turned sharply higher against the New Zealand dollar yesterday as demand for higher-risk currencies waned.

• The resumption of falling prices on the global equity markets put pressure on the kiwi but disappointing local data is also contributing to the slide.
• A poor business confidence survey yesterday followed by a sharp drop in new building approvals in May highlighted the still patchy nature of the country's economic recovery.
• Sterling has now risen a further percent this morning with the price edging back above 2.15.
• In terms of data, the market is turning its attention to Friday's US employment figures and demand for risky assets will likely be subdued ahead of this release.

 

 

 

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