Royal Alliance Capital Currency Review

Colin Nowell

Currency Analyst

August 30, 2011

US delay decision on further stimulus

The much-awaited speech by Federal Reserve Chairman Ben Bernanke disappointed financial markets and failed to provide the US dollarwith any meaningful support.

Currency Review August 30, 2011

Confirming no further measures would be used to stimulate the US economy for now, the US dollar lost support as Bernanke

confirmed the US unemployment rate was currently too high and needed to be reduced. However global markets were buoyed as Bernanke confirmed the Federal Reserve would meet for two days in September, instead of one day as previously planned, to discuss measures to stimulate the economy.  US domestic data was mixed. Durable goods orders surged in July, whilst consumer spending showed strong gains in its latest release. However, US Gross Domestic Product data for the second-quarter was revised lower, as the dollar pared gains made earlier in the week.

The pound relinquished its recent gains, falling two cents versus the US dollar and almost two cents against the euro. What little economic data there was, generally proved to be pedestrian. Industrial trends data was more upbeat for August, reversing July’s fall, whilst mortgage approvals data bettered market consensus. However, any underlying support for the pound soon diminished as Friday saw the UK’s economy grow by just 0.2% in the second quarter according to the Office for National Statistics, confirming its initial estimate of the UK’s weak economic recovery.

Continued concerns surrounding the euro zone debt situation failed to hinder its currency last week, as the euro reclaimed back some of its recent losses against sterling. Commercial European banks boosted their reliance on the European Central Bank (ECB) by borrowing €2.80 billion from an emergency lending facility in order to shore up finances. However, confirmation two of Greece’s major banks are merging helped alleviate some concerns about the Greek banking sector. Rumours of a credit ratings downgrade for Germany also failed to have an impact on the euro’s performance, as it hit intra-week highs of €1.1280 against the pound. Domestic data offered mixed messages. German economic sentiment data and euro zone industrial new orders noted modest declines, whilst euro zone purchasing managers index data showed improvements.

Buoyant retail sales data helped the Canadian dollar gain two cents versus sterling. Downbeat comments from the Reserve Bank of Australia Deputy Governor Ric Battellino, suggesting economic growth was lower than expected, had a muted impact on the Australian dollar as it added over four cents against the pound. The Japanese yen also made back ground versus sterling last week; although concerns remained over the possibility the Bank of Japan could intervene to weaken its currency. Improving retail sales data in New Zealand also helped the New Zealand dollar bounce back from recent lows versus sterling.

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