Royal Alliance Capital Currency Report

Colin Nowell

Currency Analyst

Dec. 05, 2011

Key week for the euro

 

Global stock markets were buoyed last week as central banks from developed nations took coordinated action to shore up the global financial system.

In a move designed to ease financial market stresses and help provide funding to European banks, the US Federal Reserve reduced the cost it charges the European Central Bank (ECB) for short-term dollar loans.

The action caused the US dollar to reverse recent gains versus both sterling and the euro, whilst the Canadian and Australian dollars added over three and five cents (respectively) against the pound over the course of the week. The action came before a week of crucial euro zone crisis talks.

French newspaper ‘La Tribune’ reported ratings agency Standard and Poor’s would lower its outlook on France’s AAA credit rating over the next 10 days, forcing the euro to intra-week lows of 1.1736 versus the pound.

However, the single currency soon pared losses as rumours the ECB could start lending money to the International Monetary Fund in order to pass on to Italy buoyed euro spirits. Economic data was also supportive. Although euro zone inflation remained flat, German retail sales rose during in October, whilst German unemployment figures dropped in November.

In his annual Autumn Statement, UK chancellor, George Osborne, admitted the government would have to borrow £111 billion more than previously expected by 2016, due to weaker-than-hoped economic growth. Unemployment is also expected to peak at 2.8 million in 2012, forcing the Office for Budget Responsibility to cut growth forecasts to 0.7% for next year. However, decisive proposals from the chancellor were well received as the pound reached weekly highs of 1.5759 against the US dollar.

The UK housing market showed signs of life last week as Nationwide’s housing price data along with mortgage approvals data showed gains in their respective releases. The UK’s purchasing managers’ index for manufacturing also improved during November.

US consumer confidence jumped during November by the most since April 2003, whilst new home sales rose modestly in October. Federal Reserve vice chairman, Janet Yellen, compound the dollar’s woes, stating the Reserve might offer more support to the US economy if needed. However, losses were soon recouped on Friday as non-farm payrolls beat market expectations, with private US employers continuing to add jobs at a healthy pace.

Commodity-bloc currencies such as the New Zealand, Australian and Canadian dollars took direction from improving global stock markets throughout last week. Australian economic data had a muted effect on the dollar.

There was a weaker-than-expected increase in retail sales and a second successive sharp decline in building approvals, although new home sales increased during October. The Canadian dollar was little affected by a worse-than-expected Gross Domestic Product (GDP) reading. Sterling rose steadily against the Japanese yen last week as Japanese employment data disappointed.

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