Newsletter November 2008
Sterling Overview
In our commentary last month we indicated that the Bank of England may cut the base interest rate more aggressively than the 50bps forecast and indeed they did. However what we did not see coming was the announcement of a 150bps cut, and I hasten to add nor did the majority of market analysts. This pushed UK interest rates to 3%, their lowest level since 1955 and the largest single reduction since the ERM crisis in 1992.
What effect did this have on the exchange rate? Well normally you would expect to see a currency weaken considerably after such a large cut in interest rates. However sterling actually gained in value against both euro and US dollar. Mainly in our view due to the market seeing the step as a positive move by the BoE to stimulate growth in the UK economy and make any recession as painless as possible. Unfortunately these gains were short lived, and following the Bank of England quarterly inflation report a few days later sterling lost significant value against the euro reaching an all time low.
In the Chancellor’s pre-budget report a host of measures have been introduced aimed at helping small businesses and households weather the current economic climate, including an immediate 2.5% cut in VAT. Clearly only time will tell if the measures have any affect and in any case the Chancellor cannot really lose in the sense that if UK economy recovers quickly it will be down to him, and if it doesn’t, then surely it would have been worse if these measures weren’t introduced?
As I write this report sterling has finished the best week since October after making positive gains against both US dollar and euro as we build up to the interest rate decision on Thursday. Without wanting to sound repetitive our opinion hasn’t changed much and we expect the pound to remain under pressure given the strong possibility of another large interest rate reduction. With this in mind markets are likely to remain volatile with potentially some quite large daily swings.
GBPEUR
Pressure is building in the eurozone for the ECB to cut interest rates as recent GDP figures show the eurozone is officially in recession after two consecutive quarters of negative growth. A large increase in the unemployment rate in France along with significantly lower inflation has given the ECB room to cut interest rates even more aggressively, which could devalue what has recently been viewed as a safe haven currency.
GBPUSD (Cable)
Despite the turmoil in financial markets the US dollar has gained in value against a number of currencies including sterling and euro. Was this due to Obama being elected as the next President? Only time will tell but for the moment at least whilst investors and institutions are buying US bonds in large volumes, and with certain commentators talking about a recovery in the second half of 2009 the dollar could maintain its appeal.
GBPCAD (Loonie)
Canada is a massive oil exporter and with falling oil prices you would normally expect the dollar to weaken. However, consensus at the moment would suggest the Canadian economy will be one of the few major nations to avoid a recession, hence why the loonie has remained strong.
GBPZAR (South African rand)
Regular readers will be aware the South African rand is one of the more volatile currencies, although whilst there has been turmoil in stock markets it has been a relatively quiet month for the rand with exchange rates ranging between 15 and 16 to the pound.
GBPAUD (Australian dollar)
Another 75bps cut in interest rates by Reserve Bank of Australia to 5.25% led to the dollar weakening against sterling. The dollar is heavily influenced by commodity prices so we expect exchange rates to remain volatile.
GBPNZD (New Zealand dollar)
The kiwi dollar is not linked to the Australian dollar, however it is influenced by similar factors hence why we have seen exchange rates against sterling remain in favour of the pound.
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Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency. |
