Welcome to our account of movements in the foreign exchange rate overnight, including our look ahead.
1. UK sterling has climbed against commodity currencies such as the New Zealand and Australian dollars overnight, as a downgrade of Spain’s credit rating re-ignites concerns it might need a bailout. Rating agency Fitch cut Spain’s status to just BBB last night, one rank above Junk.
Why has Fitch done this?
Because of what it sees as a dire mishandling of the Spanish situation at a European level. In spite of the efforts of Spanish premier Mariano Rajoy to rescue his banks, reform the labour market, and generally do whatever he could to keep Spain solvent, a lack of co-ordination at the international level means Spain is still vulnerable to default.
Why has the pound gained on these reports?
Because the implications of Spain defaulting are global. If Spain doesn’t get the help it needs, that would prompt a chain reaction not just across Europe, but across the US and China and Australia too. Hence, the markets sold so called risk-based currencies like the AUD, favouring more stable alternatives such as the UK. It’s about safety.
2. In addition, risk evaporated last night also, as US Federal Reserve Chairman Ben Bernanke talked about the stuttering recovery in the States, yet declined to take action to halt it.
Why is the US recovery losing steam?
In large part, because confidence in the global situation isn’t there. If there remains a high chance that Europe can implode, that stops US employers hiring people, starting initiatives, as well as limiting spending among consumers. People prefer to save, to protect themselves should a repeat of 2008 come about.
Why isn’t Mr. Bernanke doing anything about it?
Because although the pace of growth in the US is slowing, the situation isn’t yet dire enough (in his estimate) to warrant intervention. After all, the US is set to expand 2.0% in 2012, which compares to stagnation in the UK, and depression in Europe. Given that, it would take a significant downturn to convince Mr. Bernanke to take action, such as more stimulus.
3. Last but not least, the pound gains against the AUD etc. were boosted, on the Bank of England decision not to inject more stimulus this month. Neither did the BoE cut interest rates.
Why did the BoE not take action?
Because like the US, the outlook might be deteriorating, but is not yet bad enough to warrant action. This aided the pound since it suggests the UK is in better shape than forecast: more stimulus would have sent a signal that the UK needs crutches to stay aloft, as it were.
Get in touch
I do hope this post has been useful. I will return with my next update tomorrow.
If you have any questions about the foreign exchange rate or transferring money abroad in the meantime, don’t hesitate to leave a reply in the box below. I’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.