Currency market updates - from Foreign Currency Direct (www.currencies.co.uk)

Monday October 1st 2007

By Tom Holian - Dealing Director

The September of Doom

Good morning readers,

Sterling’s value fell across nearly all currencies during the month of September. The US sub-prime mortgage problems which occurred earlier in the month ended up with the US Federal Reserve cutting interest rates by half a percent on September 18th , the first cut after a stable period of non-movement which was preceded by seventeen interest rates increases. This saw EUR-USD hit its highest level since the introduction of the single currency. What this means is that currently the Euro is the experiencing huge strength which has directly affected the purchasing power of Sterling. The impact for Sterling-Euro has seen a 4% drop during the month, one of the biggest monthly drops for many years and the lowest trading between the currency pair since April 2006. A loss of nearly €12,000 on a £200,000 property.

Northern Rock

Sterling also fell following Northern Rock’s request to the Bank of England to borrow funds in order to keep up with consumer demand. Prior to this, banks had always lent funds to each other to keep liquidity high but because of Northern Rock’s business model liquid funds came close to drying very quickly. The result meant that the BofE had to lend £3bn two weeks ago and a further £5bn last week. A UK based consumer confidence survey released by research group Gfk NOP showed confidence dropped to -9 the lowest since December 2005 mainly affected by the BofE’s recent offer.

House Prices

Rightmove’s latest house price index released showed the average UK property drop by -2.6%. Many have attributed the downturn to the recent introduction of the HIPs (Home Information Pack) but others have hinted the reason may have come because of the Bank of England’s interest rate hikes earlier in the year are now having an impact on the housing market.

Bank of England

The Bank of England's Monetary Policy Committee is expected to keep interest rates unchanged at 5.75 pct when it announces its monthly policy decision on Thursday, though a majority of analysts now expect rates to fall within the next six months. All 37 of the economists surveyed by Thomson Financial News expect that the Bank of England base rate will be left unchanged at 5.75 pct. However, beyond October,  there is a growing consensus that the Bank of England will be forced to cut interest rates as the credit crunch crisis causes a marked slowdown in the UK economy. It was only two months ago that many economists were expecting a rise to 6% but because of the recent credit crunch it appears much more likely that the Bank’s next move will be a cut in interest rates.

Down Under

Rates for Sterling have also dropped against both the Aussie & Kiwi Dollar. GBP-AUD has dropped 6% whilst GBP-NZD has dropped by 8%. Putting this into perspective on a £200,000 property this has meant a difference of AUD$30,000 and a huge NZD$45,000. When movements of this magnitude start to occur it may be a case of making a decision sooner rather than later before the prices drop even further.

Ray of Light

GBP-USD had a short spurt in the upwards direction last week following comments made by ex-Chairman of the Fed Alan Greenspan. He said ‘my own guess is the odds are less than 50-50 that we're heading to a recession, but there is no question we've got significant pressure on home prices, which I expect to move down quite considerably lower.’ He went on further to say ‘with the whole housing boom, we're dealing with a world problem. In fact our housing boom is less than the average. This clearly calls for a global explanation, not just an individual explanation’. Indeed, when the US sneezes the whole world catches a cold.

So what will October bring? We all expect the leaves to start falling soon and it will be another few months before we see the return of new beginnings on the trees. Will this be the case for Sterling or are we entering a period of uncertainty with less than three months till Christmas.