Royal Alliance Capital Currency Report

Colin Nowell

Currency Analyst

Jan. 09, 2012

GBP/EUR reaches 15-month high

Sterling climbed to a 15-month high against the euro (€1.2162) last week. The single currency also slipped to a 15-month low against the US dollar ($1.2694) and to an 11-year low against the Japanese yen (¥97.830).

The euro dropped amid continuing concerns over the health of the euro zone banking sector and European political leaders’ abilities to stem the debt crisis. Markets were unnerved after France was forced to pay 3.29% to borrow for 10 years, slightly higher than at a similar debt auction last month. This is significantly higher than the yield on Germany’s 10-year bond (closer to 2%), reflecting some speculation France could be poised to lose its top-AAA credit rating. Markets also remain worried that many of the euro zone’s undercapitalised banks are heavily exposed to the debts of some of the region’s ailing governments.

Sterling rose sharply against some of the Eastern European currencies, trading at its highest level against the Czech koruna (CZK31.437) since July 2010.  The pound surged to its highest level against the Hungarian forint (HUF392.33) since January 2007, with Hungary cancelling a bond auction after citing insufficient investor demand.

The pound gained some support after an encouraging UK service sector activity report

for December. The data contrasted with other data in recent weeks which has generally added to the gloom surrounding the UK’s economic performance during the final quarter of 2011. A first estimate of fourth quarter UK Gross Domestic Product is scheduled for 25 January.

The US dollar gained versus sterling, particularly during the latter part of the week. Friday’s non-farm payrolls employment report prompted some optimism surrounding the US jobs outlook. Employment rose more-than-expected in December, led by a strong rise in private sector jobs, whilst the unemployment rate dropped from 8.7% to 8.5%. US service sector and manufacturing sector activity also accelerated. However, the Federal Reserve’s December policy meeting minutes suggested the central bank remains cautious over domestic and global economic prospects. It will also begin publishing its interest rate forecasts later this month in an effort to improve transparency over the policy outlook.

A generally bright start to the year for global stockmarkets, along with improving risk appetites, benefited currencies such as the Australian, New Zealand and Canadian dollars. Via their link with commodity prices, these currencies tend to be more sensitive to the global economic outlook. The pound fell to its lowest levels against the New Zealand dollar (NZD1.9705) and the Australian dollar (AUD1.5024) since October 2011. Canadian employment rose in December, although the pace of job creation was slightly slower-than-expected and failed to fully offset November’s decline.

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One Response to Royal Alliance Capital Currency Report

  1. John Sanders says:

    Nice writing style. I look forward to reading more in the future.

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