Exchange Rate review
In trading yesterday, Sterling fell sharply against the Euro, and rates hit a 6 week low, as more evidence of a deteriorating UK economy weighed on the pound. Rates at the time of writing are 1.0828 for GBPEUR.
Against the dollar, the pound recovered after steep falls took it to a six-week low on Monday, but analysts said this was the result of broad dollar weakness rather than independent sterling strength. Right now we have a rate of 1.3714 on GBPUSD.
So, a similar story then - the pound is weak and getting weaker while other major currencies remain stable. In my view this is due to the radical approach the UK government is taking to try and combat the downturn - quantitative easing which has only ever been tried in Japan, with little success.
Quantitative Easing
This measure starts in earnest today. The government recently created £75 billion pounds of new funds to inject into the UK economy, and today £2 billion of this will find its way into the system through auctions.
The first 'auction' will be taking place at 12pm today when the Bank will invite offers from investment institutions and also individuals, to sell government bonds, known as gilts.
Two hours later there will be a second stage of this so-called reverse auction, this time allowing banks to participate. The results, including the average price and the total amounts bought, will be published immediately after the auction. Its reported that similar auctions will then follow twice weekly.
What effect will this have on the economy?
Well, the hope is that those who sell the government bonds will use the money from the Bank to lend to individuals or companies or invest in business activity. This in my view is very risky indeed and does not bode well for Sterling.
The BoE are relying on the banks and institutions to re-lend this money and pump some back into the economy. You only have to look back at the massive amounts pumped into banks recently, and you see that none of it was passed on to consumers. If the same happens this time, it will all have been in vain, and we could see massive deflation as money is 'created' from thin air. Very dangerous times indeed.
Only time will tell, but do keep a close eye on events reported in this blog if you have a currency requirement. Expect volatility in the value of the pound as the markets try and decide whether this measure will be positive or negative for the UK economy. The governor of the Bank of England himself, Mervyn King, has even admitted he does not know how long quantitative easing will take to have an effect but claims it will "eventually work". When recently asked about the next steps for fighting the economic downturn,. another member of the BoE's monetary policy committee recently said "we will cross our fingers".
To me, crossing fingers does seem like a reliable economic tool to battle the worst economic downturn in generations, but we'll wait and see how the currency markets react!
It didnt in Japan in the '90's and I see no reason why it will be different now. The UK is taking a very different approach to the worldwide economic crisis than other economic zones such as the Eurozone and US. This is reflected in the value of the pound.
Todays Data
We have the Quantitative Easing measures as outlined above. We also have trade balance data for the UK - this is a balance between exports and imports of total goods and services. A positive value shows trade surplus, while a negative value shows trade deficit. It is an event that generates some volatility for the GBP. If a steady demand in exchange for UK exports is seen, that would turn into a positive growth in the trade balance, and that should be positive for the GBP.
Elsewhere we have some factory data from Germany, House Price Data in Canada, Mortgage Data for the US, and also the interest rate decision by the Reserve Bank of New Zealand. Expect volatility as the figures are released. Get in touch today if you have a requirement for any of these currencies, for detailed information on what to watch out for.
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Labels: EUR, Exchange Rate Forecast, GBP, Sterling Outlook, USD