Royal Alliance Currency Review

Stock markets up, sterling down

Sterling lost ground against most popular currencies last week amid hopes the G20 finance ministers might help find a resolution to the euro zone debt crisis: euro (-2.06%), Canadian dollar (-1.21%), Australian dollar (-3.93%), New Zealand dollar (-2.77%) and  South African rand (-0.73%).

The G20 talks concluded that a comprehensive plan to avoid a Greek default, strengthen banks and prevent contagion should be finalised by the 23 October European summit.

Greece also appeared closer to receiving its next €8 billion loan installment, after inspectors from the European Union, European Central Bank and International Monetary Fund confirmed they had reached agreement with Greece on further austerity measures.

Slovakia became the final member of the euro zone to ratify plans expanding the European Financial Stability Fund, the region’s communal rescue fund.

Mixed UK data failed to give sterling meaningful support. UK unemployment rose by 114,000 in the three months to August to 2.57 million; a 17-year high. Manufacturing output dropped in August, although this was offset by a small rise in industrial production.

Goods exports rose to a record high in August, helping to narrow the UK’s international trade deficit more-than-expected. Exports to the US continued to grow, although exports to Germany, France and the Netherlands fell.

The US dollar dropped sharply versus sterling in the middle of the week as investors shunned perceived safe-haven currencies. US domestic influences were relatively muted, with no real surprises from the minutes of the US Federal Reserve’s September policy meeting. A number of policymakers saw further quantitative easing asset purchases (so-called ‘QE3’) as a potent tool which should be retained as an option.

However, some thought QE3 would be more likely to raise inflation rather than stimulate economic activity, and should be reserved for when the risk of deflation was higher. This risk was judged to be relatively benign at that time.

Commodity-bloc currencies such as the Australian, New Zealand and Canadian dollars regained ground versus sterling, boosted by improving investor sentiment regarding the global economy and stronger commodity prices. Local economic data also offered some encouragement.

Australian employment rose more-than-expected in September, more than reversing job losses during July and August. New Zealand house prices gained 1.7% in the year to September.

After trading below ¥117 to the pound on 6 October, the Japanese yen lost some support as investor sentiment improved. The yen fell on Friday after reports Japanese government officials had said they might soon take steps against a strong currency.

Despite also being perceived traditionally as a safe-haven, the Swiss franc gained versus sterling (and held steady against the euro); the Swiss National Bank has so far met with success in its efforts to weaken the franc by pledging to enforce a minimum EUR/CHF rate of 1.20.

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