I think the best headline recently would have to go to Lloyds Group for “Ship ahoy. QE2!” relating to the possibility of another round of quantitative easing (QE) in the UK, after the Bank of England announces QE is still an option should the economy require further support. MPC member Mr. Posen went further calling for additional QE to begin now. A view shared by the Institute of Directors Chief Economist Graeme Leach “The Bank of England has held fire for another month, but we think the quantitative easing gun is about to be reloaded and the order to shoot given.” For the month of October interest rates remain on hold at 0.5% with no additional QE.
We have a theory that as soon as sterling becomes too strong BoE Governor Mervyn King announces some measures in order to weaken the pound (see above). Thus keeping to his strategy of ensuring the UK economy rebalances towards exports, stimulated by cheap sterling.
Away from QE headlines that have been dominating economic news recently Q2 GDP was confirmed at 1.2%. Retail sales disappointed in August dropping 0.5% from July (the first fall since January) which could be due to concerns of job prospects and the governments continued austerity drive making consumers more cautious.
Clearly there is a lot going on affecting sterling at the moment, so as always for a more in depth view on your particular currency please speak directly to your currency dealer at Pure FX.
You would be forgiven for assuming that the euro would weaken following news about Anglo Irish Bank being downgraded by Moodys to just one above junk status. Along with the Irish Government announcing it needs €35bn to rescue the Irish banking system. However in contrast the euro has gained substantially against both the pound as US dollar. Why? Well clearly we cannot be sure but there is evidence that the euro is being used to fund carry trades (the process of buying one currency, then using it to purchase another higher yielding currency like the Australian dollar). Also China has been purchasing Greek debt, which would explain the recent rise in value of the euro against lacklustre economic performance.
Despite US economic data being a bit more positive, the Federal Reserve has hinted at further quantitative easing, thus weakening the US dollar. Whilst there is potential for QE the US dollar will struggle to gain value against currencies including sterling, which is currently trading around a 2010 high.
According to the latest outlook by the International Monetary Fund (IMF) Canada will lead G7 in terms of economic recovery, forecasting 2.7% growth in 2011. That might be why the Canadian Central Bank increased interest rates to 1% surprising the markets which were expecting no change.
Not to feel left out the Australian Central Bank (RBA) also surprised markets although unlike Canada they kept interest rates on hold at 4.5%, when the markets were expecting a rate rise. Since then very strong jobs data has put the November decision firmly in focus and Nomura Chief Economist Stephen Roberts said “This data confirms the RBA’s October decision was just a continuation of the pause, and the RBA will be back hiking in November,”
GBPNZD (New Zealand dollar)
New Zealand Central Bank keeps interest rates on hold at 3%. Central Bank Governor Alan Bollard revised down his growth forecasts saying households remain cautious. 2010 Q2 growth was 0.2% which was less than the 0.9% growth Bollard had forecasted.
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.