Weekly Currency Update For Costa Del Sol

Lots of news this week and lots of sideways trading as nothing amounted to shift GBP/EUR out of its current trading range of 1.15-1.19.  Admittedly we did come close on both the upside and the downside but in the end we settled in the middle of the range at 1.17.  At the start of the week the European Central Bank has warned that the region may face another €283 billion of losses by the end of next year and so it seems that the skeletons are still appearing for Europe’s banking sector. Further write-downs are likely to appear in most major economies; however the scale of the losses in the Eurozone is likely to weigh on the euro going forward.

An article in the Wall Street Journal also highlighted the plight facing the German economy stating that “weaker tax revenue, soaring welfare bills and new spending for bank bailouts and fiscal-stimulus measures could increase Germany’s debt by more than €100bn next year”. Further write downs and ballooning debt will certainly undermine the euro, especially given the conservative stance so far taken by the ECB.  This left the euro floundering at 1.19 against the pound.

As the week progressed the tide turned in the euros favour as Rightmove in the UK reported a 0.4% month on month fall in house prices which has bucked the trend of recent improvements in housing sector data. The Bank of England also identified weakening of lending in its last survey for April. Then the World Bank predicted that the global economy will contract 2.9% this year compared to their previous forecast of a 1.7% decline.

This caused a seismic shift in the markets as the wave of risk driven rallies crashed and petered out as concerns that recent “green shoots” will not be sustainable. The effects in the markets were significant; equities were driven lower- the S&P down 3%, Nikkei down 2.8% and the Dow falling over 2%. Oil and Commodities tumbled as investors jumped into safer harbours; Oil fell 4%, Copper over 5% and Gold hit its lowest level since mid-May. In the currencies the moves were very apparent…we saw USD and Yen strength and weakness in the commodity currencies AUD, NZD, CAD and ZAR and another loser was the pound!

Later in the week the OECD (organization for Economic Cooperation and Development) provided an upbeat assessment for the economy. The think tank pointed to a recovery albeit fragile in the OECD area for 2010; for Britain it was not wholly optimistic- forecasting that the economy will contract by 4.3% in 2009 and stagnate in 2010- this goes against the grain of government forecasts of growth in 2010. It forecast that UK public debt will rise to 14% of GDP and this would prevent further the ability to act if further stimulus action was required.

GDP forecasts for other major economies show contractions of 2.8% in the US, 6.8% in Japan and 4.8% in the eurozone. This was largely neutral for GBP/EUR and if anything a touch sterling positive as any improvements in global outlook will benefit the pound.

Other news of note saw unprecedented liquidity funding from the ECB to lend at 1% for 1-year refinancing- this attracted 1120 banks in return for approximately $500 billion. The key question for the euro is how much of this funding will be converted to other currencies and when- this could weaken the euro over the next few sessions- one to watch for next week.  No change in my thoughts on gradual but continued strength for the pound as long as global outlook continues to improve.

Kind Regards,

Keith Spitalnick

Business Development Manager

Currencies Direct Limited

Plaza de las Orquídeas

Calle Orquídea - Local 5

Nueva Andalucía

Tel:       +34 902 310 444

Fax:      +34 902 310 440

Mobile:  +34 687 417 035

Email:  keith.s@currenciesdirect.com

Web:    www.currenciesdirect.com

Many thanks to Keith for his continued update

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