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Foreign currency exchange potential reaction to G20

Market CommentaryForeign currency exchange potential reaction to G20

Sterling Overview

Okay so we are all aware the UK is currently in recession, the question everyone wants to know is how bad and long it will be? If we are to believe the International Monetary Fund (IMF) then out of the main G7 nations the UK will be in recession longer than most. However certain politicians are saying the UK is ideally placed to deal with the Global recession.

Cutting through the plethora of economic data Lloyds TSB are forecasting UK output in line with or worse than the 1980’s rather than 1990’s. With this in mind UK growth ought to bottom out towards the end of 2009. As I write this commentary London is building towards hosting the G20 summit, where Prime Minister Brown is likely to engage in “lively” debates about further fiscal stimulus.

All of this is playing havoc with currency markets and exchange rates, where we now see more price movement on the back of comments by politicians than economic data releases. This brings me onto the latest mortgage data indicating an increase in mortgage approvals for the fourth consecutive month, the highest figure since last year.

Now I don’t think anyone is suggesting for a second that one piece of data means the worm is turning, however once the credit market returns to normal we should begin to see more encouraging signs.

Whilst sterling is likely to remain under pressure in the short-term we are predicting a stronger pound towards the end of the year. For a more in-depth analysis please contact one of our Currency Dealers on +44 (0) 1494 671800.

GBPEUR

The European Central Bank will announce the latest interest rate decision on Thursday, with a 50bps cut to 1% on the cards. What will be more interesting is whether they announce new measures to improve liquidity in euro zone economies following some very negative data from a number of member states, including German unemployment rising to 8.6%. If they do decide extra measures then we could see euro lose value against both sterling and US dollar.

GBPUSD (Cable)

The US Government have effectively told General Motors their rescue plan is not good enough, forced the CEO to resign and to report back with a more aggressive 60 day turnaround strategy. Continuing worries about the US car industry is weighing on American stock markets and as a consequence also the dollar. Having said this risk appetite remains low and as such investors are still, for the short term at least, purchasing US dollars.

GBPCAD (Loonie)

No one likes saying I told you so, however recent data in Canada indicates the economy is likely to fair better than most during this Global downturn. Inflation data was much stronger than expected, limiting the Central Bank’s need/desire to cut interest rates further. We did say something similar a few weeks ago.

GBPZAR (South African rand)

The South African Reserve Bank made a surprise announcement that it is rescheduling its MPC meetings from bi-monthly to monthly. There was a question over the timing and sure enough at the subsequent meeting MPC cut interest rates by 100bps to 9.5%.

GBPAUD (Australian dollar)

Like many developed economies Australian treasury have launched a new $75bn loan scheme designed to slow the rate of home repossessions and help homeowners revise terms of existing loans. The cost of this initiative and deterioration of public finances could begin to drag down AUD gains.

GBPNZD (New Zealand dollar)

Investors are the most bullish about New Zealand dollar since 2003, forecasting that as other central banks print massive amounts of extra money New Zealand dollar could benefit. Also, home building approvals rose 11.6% from a decline of 13% in January.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800. Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency.

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