The recent election of Donald Trump seems to have signalled a change in Sterling’s fortunes, in the short term however whether this is a respite or a reversal is yet to be seen. The swing could be as some regard the UK’s relationship with the US will be closer following Trump’ election, due to his links with the country, although we are yet to experience the triggering of Article 50 and the beginning of negotiations with the US and the EU. On the flip side the President Elect has made statements about existing trade deals being renegotiated which throws the trans atlantic trade agreement into some doubt.
The Pound recovered nearly 4% against the Dollar and over 5% against the Euro from their recent lows.
Following a rather crazy month where we have seen exchange rates bounce all over the place, the consensus is that things may have levelled out somewhat. A survey of brokers suggested that all the “political shocks” of the last month such as Brexit and the change in PM have now been priced in and going forward it is back to basics, i.e. fundementals.
However with another BOE meeting to discuss rates today, the FED talking up another interest hike don’t expect completely smooth sailing and the “political” element of the small matter of an US election in November could shake things up a bit.
Following the fun and games of last week’s result, plus all the toing’s and froing’s of various leadership contests GBP had looked like it had found its base and was recovering against the Euro and the Dollar. Much of this was the level headed speech made by the head of the Bank of England Mark Carney on the day of the result, however his remarks this week have now lead to a 1% further fall. In his speech yesterday pointed to a deteriorating outlook of the British economy meant that the Bank would provide further stimulus this summer. Many took from this that he meant a cut in interest rates from the historic low of 0.5% to .25% or even 0% and further quantitive easing.
This is great for shares and there is access to cheap money and the more money flowing around the system means better returns from companies. However more pounds printed means a devaluation of the pound, hence the drop. How much further depends on many different things, such as how the British economy fairs against its peers and whether interest rates do indeed go down and more importantly how much of the Banks fund of £250bn the governor needs to use to keep the economy afloat.
Following the addition of Boris Johnson as the Exit camps heavy weight hitter the financial markets finally started taking the possibility of a “Brexit” seriously, with credit agencies putting the odds up from 10-20% to 30-40%. This resulted in a fall of the pound against the dollar of 1.7% at one point, to finish at 1.4%. This is the lowest level since 2009.
On top of this the likelihood of a UK interest rate hike looks even less likely, so in total the Pound has fallen 17% over the past 18 months.
A vote to stay would increase the chances of a rate increase and confidence, so would result in a stronger pound, a vote to leave would result in a weaker pound. For how long no one can say.
European markets fell sharply today, led by commodity companies, on the back of weaker than expected import data from the Chinese. In short they are buying less raw materials and worse German cars!
This has sent investors running, but to where? The news from China has caused flight from the Dollar but with Singapore announcing their own financial easing program, money printing, and the UK posting a deflationary number today, money headed towards the YEN.
The Eurozone remains comparatively steady, which may add fuel to the safety in numbers argument of the pro union debate to come in the UK.
Right on cue the expected slow down in the Chinese economy has dragged its fellow Asian currencies lower as it continues with its miserly 4-7% growth, depending on who you go by, but exports fell by 8% as the sorry roundabout continues. The Chinese spend less with the West, the West have less money to buy their goods and so on. There is also concern at the levels of debt in the country as the population get to experience all aspects of capitalism.
This continues to impact the Australian Dollar, whose economy is heavily dependent on the Chinese’s insatiable appetite for their commodities.
Meanwhile also to script the Bank of England and the US Fed march on towards the mush anticipated, and quite frankly seriously old news of their respective interest rate rises. Both expected before the end of the year. The Pound remains strong due to the endless Forward Guidance commentary given, while the FED is still just giving clues so the Dollar is a bit more volatile in response, Dollar up against its peers.
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This week it was announced that during February the UK experienced zero inflation for the first time in recorded history. This sent the money markets into a spin as they were just getting used to settling inflation and the prospect of rate rises sometime in the near future and they were hit with this shock news.
Historically low levels of inflation meant that a currency would strengthen against its peers as it was seen as stable and there was not an influx of “new money” into the system, it is also good news for consumers who feel better off as they earnings start to outstrip inflation in prices of good and services. However this news had the opposite effect and sent the Pound into a downwards motion against the Dollar and Euro.
The two main reasons behind this are that the main driving force behind the fall is plainly obvious and something that the whole world is experiencing and that is the huge fall in the price of oil. This is driving everyone’s inflation downwards, so is less of a clear indication of how an economy is performing. Secondly the BOE has stated that although rates rises are not likely any time soon, to rule them out based solely on an almost artificial fall in inflation would be unwise, which sets out their intentions to push ahead with a rise at some point.
So until the UK election in May expect the Pound to bounce around these levels before the result gives the markets more idea of where they think the UK economy will be heading.
American and British tourists are set to visit Europe in their droves this Summer as the Euro plunges to its lowest levels against Sterling since 2007 and in the lowest level against the US Dollar in over 12 years!
On top of the continued uncertainty with the incoming Greek government and its negotiations with the ECB over its debt levels, the ECB started its money printing exercise (Quantitive Easing) by buying €1.14tn of bonds during the next 18 months.
This just as the US and UK begin to wrap up their own financial stimulus packages and ultra low inflation seeps in due to the continued downwards pressure on the price of oil by the over supply by OPEC. This cheapens imports in the Eurozone, however much of the pricing is done in US Dollars so the impact is offset.
However it does mean that for the time being tourists are enjoying some of the best value exchange rates we have seen for a decade.
This week has seen a double whammy for the Eurozone and the price of the Euro. Firstly the market reacted to the new raft of stimulus packages expected to be announced this week, including the printing of money to buy up Euro bonds.
However just as the market took their positions on what levels this quantative easing would be set at the Swiss government lobbed a proverbial hand grenade into the mix. Since 2009 the Swiss central bank has artificially held back the price of the Swiss franc by buying other currencies and offsetting them. However the Swiss Central bank this week decided that it could no longer carry on with this practice and stopped. The immediate effect was a 40% swing in the exchange rate with the Euro, which later settled at 16%. The Swiss Central Bank tried to counter this by introducing negative interest rates to stop money flowing into the country and inflating the currency yet further. Swiss stocks all took an instant hit as both their exports and their income streams would be predominately in Euros and these were down 16%.
The Euro hit a 9 year low against the Dollar as noises from the ECB spooks the markets. Firstly the ECB president Mario Draghi has hinted that the Euro zone could begin its own phase of quantitive easing or money printing, just as the US starts to rein in its own stimulus packages. On top of that German Chancellor Merkel’s comments that the Eurozone could survive if Greece left the single currency didn’t exactly fill the markets with much confidence.