Royal Alliance Currency Review

Colin Nowell

Currency Analyst

September 05, 2011

Will QE3 launch this month?

The minutes of the US Federal Reserve’s August policy meeting suggested some policymakers favoured more action to boost the
economy. Amid growing talk of another recession, this prompted speculation the US central bank might soon adopt a third phase of quantitative easing (QE3). It previously confirmed its September policy meeting will last for two days rather than one.

Friday’s US non-farm payrolls report added to pressure on the Federal Reserve to take steps to help the economy. US employment unexpectedly stagnated in August, with a small rise in private sector employment completely offset by government sector job losses. The report fuelled concerns the US economic recovery is stalling, although the US dollar was largely able to shrug off this disappointment.

Sterling’s fall against the US dollar suggests markets remain unconvinced UK economic prospects are any more encouraging. UK manufacturing activity weakened further in August, contrasting with a surprise expansion in US manufacturing activity. UK consumer confidence also fell to its lowest level in four months in August, suggesting the weak economic recovery is likely to see households keeping a tight rein on spending over the coming months.

The euro zone’s faltering recovery was also evidenced in the region’s latest manufacturing activity data; its pace of decline matching the UK’s in August. Disappointing economic news, along with lacklustre demand in the latest Italian and Spanish government debt auctions, prompted renewed concerns over the ability of the European Central Bank to contain the debt crisis. Sterling gained against the euro over the second half of the week, as Italian and Spanish government borrowing costs climbed.

Hopes of further US stimulus measures and improving global stock market performances early in the week initially benefited the commodity-bloc currencies such as the Australian, New Zealand and Canadian dollars. Local influences were mixed. Weak Australian retail sales and home prices data suggested household finances remain pressured, whilst a strong rise in business investment pointed to a robust corporate sector. The Canadian economy stumbled in the second quarter of 2011, with its Gross Domestic Product (GDP) shrinking at a 0.4% annualised rate. The decline was led by a sharply weaker exports performance, which was hindered by the strong Canadian dollar.

Sterling was unable to continue its recent ascent versus the Swiss franc. The pound dropped from early highs of CHF1.3535 to finish the week at CHF1.2787. The franc was boosted by comments from the Swiss Economic Minister who noted the government does not target a specific value for the currency and is likely to remain strong for some time. This raised some questions about how effectively the Swiss National Bank might be able to hold down the franc. The pound also failed to recover ground against the Japanese yen (another currency often perceived to be a safe-haven), despite weaker-than-expected Japanese industrial production and retail sales data.

After reaching a 2011 high of INR76.124 on 25 August, the pound slipped slightly against the Indian Rupee. Indian GDP growth of 7.7% over the year to June met expectations, although the Reserve Bank of India (RBI) has proved willing to sacrifice some economic growth in an attempt to curb high inflation. Inflation is currently running at around 9% despite the RBI having lifted interest rates 11 times since March 2010.


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