Royal Alliance Capital Currency Report

Little festive cheer for the euro

The pound rose last week to its highest level against the euro since mid-February, as events in the euro zone continued to dominate foreign exchange markets.

Concerns the latest EU leaders’ summit had fallen short of the decisive action required to solve the sovereign debt crisis continued to weigh on the single currency. This prompted further worries some of the region’s members could soon see their credit ratings downgraded. Fitch, a ratings agency, suggested it was considering downgrading its ratings for Belgium, Spain, Slovenia, Italy, Ireland and Cyprus. Italy had to pay 6.47% to borrow for five years in its latest government bond auction, representing the most expensive rate since adopting the euro.

Germany’s Chancellor, Angela Merkel, again voiced her opposition to the European Central Bank doing more to stem the crisis. She reiterated her preference for greater budget discipline (and further austerity measures) as the solution, even though this might push the euro zone economy towards recession (and hurt Germany’s exports). Euro zone industrial production fell for a second consecutive month in October. This was the first time production has fallen for two months in a row since early 2009.

UK economic data generally disappointed expectations. Unemployment rose to 2.64million in October, the highest level since 1994. The increase was led by public sector job losses, with private sector job gains failing to compensate sufficiently.  A drop in retail sales in November also prompted concerns the crucial December holiday period could prove difficult for retailers. Consumer price inflation fell from 5.0% to 4.8% in November, suggesting inflation might have peaked at 5.2% in September.
The US Federal Reserve left interest rates unchanged and reiterated its intention to maintain very low lending rates until at least mid-2013. The central bank’s changes to its economic outlook were balanced; noting some improvement in domestic employment prospects but also a deteriorating global growth outlook. The US dollar generally capitalised on the euro’s woes, tending to gain ground versus sterling as optimism waned over the euro zone’s ability to solve the region’s crisis.

Falls in commodity prices, including a near-7% drop in gold prices, left the South African rand and the Australian, New Zealand and Canadian dollars all nursing weekly losses versus the pound. Domestic influences were relatively muted, with Australian business confidence holding steady in November, whilst Canadian manufacturing sales slipped slightly more than expected in October.

The Swiss National Bank (SNB) kept interest rates close to 0% and reiterated it would ensure a minimum EUR/CHF rate of 1.20. The Swiss franc regained some ground versus the euro and sterling after the announcement, which disappointed some earlier speculation the SNB might try to weaken the franc by opting to enforce a higher minimum EUR/CHF rate.

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