Royal Alliance Capital Currency Report

Euro fades as ECB acts

The European Central Bank’s (ECB) second offering of cheap three-year loans to European banks was a major focus for currency markets last week. Banks borrowed a further €530 billion, adding to the €489 billion taken in December, fueling hopes that more credit will flow to the wider economy and support jobs.

The ECB’s actions will also be intended to restore some confidence by bringing down borrowing costs for the euro zone’s heavily indebted governments. Yields on Italian and Spanish debt have dropped sharply in recent weeks, with Italy’s cost for borrowing for 10-years falling last week to its lowest level since September. Italian and Spanish banks are reportedly using the proceeds of the cheap loans from the ECB to lend to their governments at a higher interest rate.

If sentiment was boosted by the ECB, it was dampened slightly by the US central bank. US Federal Reserve Chairman Ben Bernanke’s testimony to Congress failed to give any indication the bank is moving closer towards providing more stimulus to the economy, choosing instead to focus on ‘positive developments’ in the jobs market. By contrast, the euro zone’s unemployment rate reached a fresh high of 10.7% in January, amid concerns the region is verging on a renewed recession.

The latest US data struck a positive tone. A second estimate of Gross Domestic Product (GDP) showed the US economy expanded at an annualised 3% in the final quarter of 2011 – up from a 2.8% initial estimate. The manufacturing sector grew for a 31st consecutive month in February, although the pace of growth unexpectedly moderated. Improving global investor optimism typically proved a negative factor for the US dollar over the course of the week, although the dollar reversed its losses against the pound on Friday.

Generally buoyant global stock markets and commodity prices ensured the commodity-led currencies such as the Canadian, Australian and New Zealand dollars maintained their strong start to the year against sterling. From a domestic view, a subdued 0.3% rise in Australia’s retail sales in January suggested relatively high interest rates are keeping consumers in a cautious mood. Canadian manufacturing activity picked up pace in February, suggesting the manufacturing sector continues to improve albeit at a weaker rate than in late 2011. Canada’s GDP growth in the final quarter of 2011 slowed as expected to an annualized 1.8% rate, compared to a 4.2% pace of growth in the third quarter of 2011.

Switzerland’s economy recorded surprise growth of 0.1% in the final quarter of 2012, fueled by a robust exports performance despite a strong Swiss franc. However, the data had little impact on the currency, since the Swiss National Bank remains committed to maintaining a cap on the franc’s value at a euro/franc rate of 1.20 to shield its exporters from an even stronger currency. The sterling/franc rate rose 1.77% over the week to close at 1.4471, mirroring the pound’s rise versus the euro.

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One Response to Royal Alliance Capital Currency Report

  1. Pingback: Royal Alliance Capital Currency Reprot « Royal Alliance Capital

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