Royal Alliance Capital Currency Report

Colin Noewll
Currency Analyst
April 16, 2012

£/€ reaches 19-month high

Sterling climbed against the euro last week and extended its gains in early trading on Monday to reach a 19-month high of €1.2179.

The single currency’s decline came amid intensifying fears relating to the euro zone’s sovereign debt crisis. There is increasing concerns Spain might be next to need a bailout, with the country’s 10-year borrowing costs soaring to a 4-month high. A fragile banking sector, stagnating economy and an unemployment rate approaching 23%, continue to raise doubts over Spain’s ability to reduce its national debt.

UK data announcements themselves offered little in the way of a platform for the pound to take greater advantage. Reflecting a sharp fall in UK exports, the trade deficit widened to its highest level for three months in February. Despite hopes UK manufacturing and exports will eventually rebalance towards faster-growing developing markets, around 60% of exports are to a euro zone economy which is verging on a renewed recession.

Global economic prospects were dented after China’s Gross Domestic Product grew at its slowest pace for almost three years in the first quarter of 2011. This undermined some support for the commodity-led currencies, such as the South African rand. However, encouraging domestic economic influences enabled the Australian and New Zealand

dollars to record gains versus sterling over the week as a whole. The Australian economy added more jobs than expected in March, whilst New Zealand’s manufacturing sector continued to rebound after a disappointing performance in the final quarter of 2011.

Despite broader financial market volatility, the US dollar generally held to relatively tight trading ranges against the pound ($1.58-1.60). The latest US consumer inflation figures were as expected. This reinforced the view that the US Federal Reserve will have scope to hold interest rates at close to zero into 2014, particularly if continuing high unemployment prompts inflationary pressures to moderate in the coming months.

The Japan yen, a currency often perceived as a safe-haven, gained ground versus sterling. The currency found support after the Bank of Japan left interest rates at 0.1% and its asset-buying programme unchanged, amid some signs of recovering economic activity.

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