Clearly, Thursday’s general election is the key factor affecting exchange rates this week and sterling has maintained a steady stance against most major currencies despite the prospect of a hung parliament. One would normally expect the possibility of a hung parliament to cause sterling to weaken, especially given the current financial climate where a coalition government might struggle to take the necessary steps to reduce the fiscal deficit.
However the pound may just be temporarily supported by recent economic data such as strong inflation figures causing a rise in the value of the pound. Additionally, although the three main political parties disagree on method, there is a strong consensus that the budget deficit is a priority and needs to be cut.
For those interested in electoral history there seems to be little connection between the value of the pound and government majorities. Since 1974 after the four largest majority winning elections the pound actually fell by an average of 1.3%. However the pound tends to strengthen after a general election, regardless of the size of the majority. This has occurred in 5 out of the 9 elections since 1974.
Elsewhere, former BoE (Bank of England) policy maker Timothy Besley commented the UK economy remained in a fragile state, although inflation is likely to stay under control this year. This has contained fears temporarily that rising inflation could force the BoE to increase interest rates, potentially placing the recovery at risk. Rumours concerning the UK’s AAA credit rating and a possible downgrade still fail to disappear, particularly following downgrades in Greece, Spain and Portugal. However the UK looks safe for the time being at least.
Once again there is an agreement on the EU (European Union) / IMF (International Monetary Fund) rescue package for Greece allowing Greek bonds to be discounted encouraging investors to purchase Greek debt, although there is a distinct sense of déjà vu. There is concern that the rescue package will not be sufficient and that other euro member states including Spain and Portugal could also need a bailout. The decision now centers on Greece’s willingness to adhere to the austerity measures set by Germany.
The Federal Reserve kept interest rates on hold and maintained its view that rates would remain low for the foreseeable future at their meeting last week. The dollar has remained range-bound against sterling although has gained against the euro as investors seek a short-term safe-haven following troubles in Greece.
The Canadian dollar has been largely driven by the interest rate outlook following what the BoC (Bank of Canada) ‘did not say’ in its monetary policy announcement. On this occasion the BoC did not state that it would keep interest rates low until the second half of the year. As far as the market was concerned a rate hike in June was priced in and the loonie strengthened by 3 cents.
The RBA have again increased interest rates by 25 basis points taking the base rate to 4.5% and maintaining the Aussie dollar’s strong stance. There has been little else to talk about as far as the Aussie dollar is concerned as economic data has broadly fallen inline with expectation.
The rand has remained largely range-bound recently as there has been little economic data to support movement or indeed guide investors. Interest rates are currently set at 7%.
GBPNZD (New Zealand dollar)
Poor economic data last week brought about volatility as investors bought into the kiwi dollar but soon sold out when inflation data undershot both quarterly and annual forecasts by some margin. The BoNZ (Bank of New Zealand) kept interest rates at 2.5% and the inflation data is likely to enhance the view that interest rates will stay low in the short-term.
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.