Tuesday, June 1, 2010

Exchange rates market update

The latest market report from our friends at Foremost Currency Group

Pound vs. Euro
Last week was one of relative strength for Sterling as it rallied against the Euro from levels of 1.15 on
Monday the 24th of May up to highs of 1.1872, last seen in June 2009 on Thursday afternoon.
Sterling’s strength did not come from its own strong economic fundamentals however, but more the
dire straits that the euro zone finds itself in and a report from The Organization for Economic Cooperation
and Development (OECD) which said that “due to the continuance of higher inflationary
pressures within the UK the raising of Interest rates by the MPC towards the end of the year were
inevitable.” These two factors combined sent investors flooding back to the pound and soaring against
its beleaguered neighbour.
Sterling’s Climb was however halted abruptly on Thursday, after news that UK consumer confidence
fell for the third consecutive month in May, reflecting uncertainty ahead of the election result and the
prospect of fiscal tightening once a new government was in power. This bad news was also coupled
with a release from The State Administration for Foreign Exchange (SAFE) China's foreign exchange
regulator who deploys the nation's excess reserves. It denied through its website that it was reviewing
its euro-area holdings saying, "Europe has been, and will be, one of the major markets for investing
China's exchange reserves” This single statement and positive tone helped the euro to gain ground
leaving behind its lows of earlier in the week.
With euro zone government debt worries outweighing concerns about the UK, one could expect to
see further downside for the euro, at least in the near term.
On Monday panic hit the currency markets and the Euro started to flounder as it came under renewed
pressure. This time instead of the pressure coming from the euro zones lead economy Germany,
who the week before had undermined the Euro with its ban on short selling, This time renewed
concerns about EU debt crisis continued to surface following comments on Monday from the IMF that
the Spanish economy needs reform. This comment came just as the rescue of Spanish bank Cajasur by
the Bank of Spain sparked fears about the stability of Spanish Banks.
Subsequently four Spanish banks have since announced plans to merge. These concerns have
hampered the Euro and lead investors to seek "safe havens" for their money with the US Dollar being
the big winner and the home of the majority of FX reserves worldwide.
To help combat the negativity surrounding the euro zone and its flagging currency Spain, Portugal and
Italy as well as Greece have all released austerity measures (Where a government reduces its spending
and/or increases fees and taxes to pay back its creditors) “ to try and ebb the flow of Euro zone decay.
For Most People… ¦ For Most Reasons… ¦ For Most Currencies…
The continued weakness of the euro is a concern, with investors dumping the currency amid fears that debts
will cause defaults by weaker countries in the European Union. The single currency has fallen in value by
almost a fifth against the dollar in the last six months.
It is worth noting that Sterling is closely aligned with that of the single currency. Debt worries continue both
in the UK and Europe, Austerity measures have been announced by both and with 54% of UK exports
heading to Europe it is no wonder that the pound finds itself struggling against the Dollar whilst frequently
undergoing abrupt shifts and reversals against the Euro.
When reviewing the week’s data and fundamentals as mentioned, it continues to show the fragile state of
Sterling and the UK Economy.
Time will only tell but the continued economic weakness in both economies will halt the dramatic gains that
many had hoped for during the summer months and instead will be replaced by a volatile and uncertain
Pound vs. US Dollar
Last week saw a 2.4% variation in cable between the highs and the lows of the week. This is as speculators
raise their bets against sterling to record levels after the formation of the new coalition government and
worries escalate over the health of the country’s finances.
Data released by the Chicago Mercantile Exchange showed that these speculators had further increasing
their short positions in Sterling taking the ration of short-to-long positions to nine-to-one. Essentially for
every one prediction that Sterling was set to gain strength, there were nine positions stating the opposite.
This overwhelming negative opinion of the pound saw a 14-month low for the Sterling-Dollar currency
pairing at $1.4230.
Jeremy Stretch at Rabobank stated however, that “with the ratio of shorts to longs almost nine-to-one, the
scope for a snapback in sterling on any better news remains significant.”
On Tuesday we saw a host of data releases including figures for Q1 GDP as well as the Queen’s Speech at the
State Opening of Parliament where key policy announcements were made with respect to future spending
As the dollar performs well against a basket of currencies, sterling has been rather sensitive. Whilst data
showed that the British economy grew 0.3% this first quarter, the currency has still lost more than 11
percent against the dollar this year.
This sensitivity and thus possible volatility is likely to be tested further as Chancellor George Osborne
announced 6.25 billion pounds of public spending cuts in an effort to trim the budget deficit.
The dollar as well as the yen both gained ground this last week as nervous investors pondered the escalating
tensions in South and North Korea and the euro-zone sovereign debt crisis.
For Most People… ¦ For Most Reasons… ¦ For Most Currencies…
As the dollar experienced renewed safe haven status due to issues within the Korean Peninsula, the
euro fell below $1.22 as concerns over the European banking system after the recent bank bailouts in
Spain increased.
Whilst Britain’s fiscal deficit is running at some 11% of GDP, the new government has been setting out
measures to lower it and as a potential boost for sterling; the evidence that there are rising
inflationary pressures which some analysts think may prompt the Bank of England to raise interest
rates before the end of the year.
The remainder of the week saw a worse than expected annualised rate for Q1 GDP in the United
States and sterling was able to make some gains on that news coupled with a light data calendar that
left the market focusing on external factors, primarily movements in risk and equity markets.
During this week of ups and downs, we here at the Foremost Currency Group have been helping
clients secure the best possible rates for their currency purchases.
One of the tools at our disposal, the Stop Loss and Limit order, helps clients to optimise their
purchase. By talking to your account executive and knowing where to place a minimum and/or
maximum on your exchange rate it is possible to safeguard against any potential loss should the
market drop and ensure that you are able to take advantage of any upward spikes without having to
watch the currency markets.
For the week starting 31st May, the U.S. as well as the U.K. had bank holidays on Monday. This leaves
important U.S. data releases on Tuesday concerning manufacturing levels and Friday concerning both
Non-Farm Payrolls and unemployment rates.
See the relevant data releases below for a concise round-up of volatile market movers; however it is
well worth taking the time for a consultation with your Account Manager here at the Foremost
Currency Group. We keep abreast of economic data releases and opinion polls to allow us to deliver
sound market knowledge, helping maximise your Sterling/Dollar currency potential.

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