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

Thursday August 23rd 2007

By Nick Black - Executive Dealer

Yesterday...

Trading on Wednesday saw Sterling up Vs the Yen 1% and Dollar 0.45% as high yielding currencies made a slight comeback and the markets seemed calmer.

Analysts say that the pound may benefit from the return of relative normality in the markets this week, however any further bad news or revelations on the banking sector could see returns to sharp losses and a more costly currency transaction!

If The Bank of England hints towards a rate hold next month, this may bolster Sterling in the short term, however if there are cuts on the horizon then losses may be seen in the value of GBP against the major currencies.

It appears the Flooding and potential foot and mouth outbreak that we witnessed only a couple of weeks ago is well and truly out of the news and leading to a little more confidence within UK Plc as expected losses may not be realised. This may have helped to maintain investor’s confidence in the Pound and could mean more Foreign Currency for your money.

However the view of the world markets is not as rosy with a constant news feed and analysis on how defaults in the US Sub-prime mortgage market may affect the global economy. Significant reports this week have touched on the effects of the sub prime losses on European banks including two of Germany's largest state owned banks, which have required bailouts. This may damage the belief that the UK is safe from this crisis and could see a flight of capital and a weakened Sterling.

Also The  Times in London Reported that this crisis was “inching close to the heart of the British Financial system” as HBOS is propped up its own £19Bn equity fund having seen defaults rise. Barclays was the reported recipient of a £300 Million emergency fund from the BoE on Tuesday and fears are spreading to the Insurance market as they are having problems borrowing money to underwrite risk.

Astonishingly for the first time in many years we may see significant job losses in the City of London said Jonathan Said, from the Centre for Economics and Business Research. Up to 5,000 jobs may go as the warning comes after weeks of upheaval in financial markets that has threatened to bring to an end a rich period of expansion and profit growth.

With fears that the true extent of the sub prime liabilities held on the balance sheets of UK banks and institutions still not fully known, job losses in the world’s largest financial centre, this uncertainty has seen many of our clients are turn to their account manager for guidance on the best way to navigate these troublesome times and hedge their risk in a volatile and potentially costly period. Call 0800 382 5884.

GBP USD

Reports last week that the Monetary Policy Committee "were of no firm view" on whether to alter interest rates in the UK and we shall see over the next week or so as to whether this was the right decision in terms of retaining strength for the pound whilst keeping inflation down and not harming the growth.

The Fed is looking to alleviate the credit crisis by cutting their Fund rate at which they lend to institutions. However there are members of the Federal Reserve Board who are rate cut negative and do not believe that the current climate warrants such action. Jefferey Lacker, President of Richmond Federal Reserve said, "Interest Rate policy needs to be guided by the outlook for real spending and inflation". In other words rate changes will be made in response to the levels of consumer spending, the pressure from inflation and levels of unemployment.

Thomas Lam, Treasury Economist at United Overseas Bank argues that the Fed do not want to give the impression that they are "bailing anyone out" and would act IF the current crisis started to have a major impact on economic growth and headline inflation.

With the unpredictable monetary policy in the world’s largest economy, why don’t you call us at FCD and discuss how best to protect your currency transaction.

GBP JPY

With the Bank of Japan expected to keep its rates on hold today in light of sluggish economic growth and global turmoil. The carry trade buyers are expected to refocus on interest rate differentials. The high yielding Antipodean currencies may see a recovery against the basket of major currencies so strike while the iron is hot and secure your rate today.

GBP EUR

The pound closed down slightly against the Euro at close of business on Wednesday. The Pound Vs Euro pair appears to be the least volatile at the moment as the likelihood of interest rate hikes and inflationary pressures subside, whilst solid economic growth will abate the rate Doves as the EU's exports steam ahead.

And Finally...

Moneyweek.com reported that China is not experiencing so much as a credit crunch, but strong inflationary figures. Soaring food prices (the price of pork going up a staggering 85% year to date) and wages in the world’s fastest growing economy have risen by 21% so far this year.

You may have no desire to buy a house in China. However these sorts of pressures on the costs for producers, the period of low cost Chinese exports may be over. This combined with a potentially more expensive Chinese Yuan could see Chinese imports become a lot more expensive.