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Hi All,

Here is an update of what’s been happening in the Currency Markets throughout September with the USD.

The UK data at the start of September could easily be read as supportive of the more negative view of the UK economy with a rise in UK mortgage approvals being offset by a fall in net mortgage lending and another decline in lending to businesses and consumers continuing to pay off debt. Another healthy rise in the Nationwide house price index (+ 1.6% in August) took the decline in the past 12 months to just -2.7% but analysts everywhere are very concerned about the lopsided nature of this recovery, concentrated as it is in the south and on larger properties, and continue to sound the ‘it will never last’ type warnings. However the most damaging data (for Sterling) was the large fall in business investment in Q2 (-10%). This could only mean one thing for the forthcoming revision of Q2 UK GDP (Gross Domestic Product), it was going to be downgraded.

But when the data was revealed GDP had been revised to a slightly better -0.7%, still way off the positive figures across the Channel, but at least moving in the right direction, and this helped the Pound recover some ground.

Mid month: GBP/USD gave the misleading impression that Sterling was holding up well in the face of potentially negative news for the UK economy. In fact Sterling was wilting fast against the Euro and owed its stability against the Dollar to the latter’s continued weakness in response to global stock market and commodity gains. Mervyn King and his cautious band of followers sparked this latest bout of Sterling bashing, testifying to the Treasury Select Committee that there would only be a slow and protracted recovery and that “growth rates didn’t tell the full story”. He reiterated that deflation was their main concern and that unemployment would continue to rise even as low levels of growth returned. Perhaps even more significantly, King suggested they were looking at lowering the interest rates on bank’s deposits with the BoE (Bank of England). This would be another escalation of the easing programme since the measure is a disincentive to leave funds idle with the Central Bank. The aim being to stimulate fresh lending to the economy instead. The already historically low market interest rates eased on this comment and Sterling fell.

On the hard data, unemployment rose from 7.8% to 7.9% and retail sales disappointed by failing to rise in August. The first positive reading for the forward looking RICS (Royal Institution of Chartered Surveyors) housing data for 2 years was lost in the gloom and a further collapse of £15 billion in net lending to businesses and a record public sector debt for August at £16 billion, ensured that Sterling would end the week firmly under the cosh.

US data and comments from Bernanke encouraged the US and global stock market gains with a healthy 2.7% rise in retail sales (mostly due to the ‘cash for clunkers’ car scrapping scheme), a second consecutive rise in industrial production and further bounces in the leading indicators in the US housing market (starts and permits). The Fed Chairman said that the recession is very likely over.

For the second week running it was the Bank of England who acted as a catalyst to send sterling lower on the foreign exchange markets. The obvious pressure point threatened to be the release of the minutes of this month’s MPC (Money Policy Committee) meeting on Wednesday but on Monday markets reacted to a Bank of England quarterly bulletin containing a scholarly article dissecting the reasons for Sterling’s decline during the credit crunch. As the FT (Financial Times) reported on its front page the next day, “changes to Britain’s relative economic outlook, the perceived riskiness of its assets and the need for the economy to rebalance away from domestic consumption had all contributed to sterling’s near 20% fall over the past two years”. The central bank’s economists said that while some factors behind the pound’s fall might be temporary, others could be longer lasting, suggesting “the long run sustainable real exchange rate” of the pound could have been lowered.

The release of the minutes recently actually helped sterling temporarily by failing to mention the idea of cutting the rates paid on commercial bank reserves with the BoE – the catalyst for sterling negativity the previous week. But on Thursday morning a regional newspaper in the north-east, The Journal, published an interview with Mervyn King who, in addition to sounding cautious on the prospects for economic recovery said that the UK needed to shift resources to the export industries and commented that “the fall in the exchange rate that we have seen will be helpful to that process”. Once again this was not a forecast but was yet another official endorsement of the weak Pound. Sterling sellers came out in droves again.

Current Central Bank Rates:

US: 0.25% - Federal Reserve Bank (next meeting 4th November)
UK: 0.50% - Bank of England (next meeting 8th October)

GBP/USD Highs & Lows of September:

High: 1.6743
Low: 1.5769

A movement of: 6.18%

Difference this would make on £200k

High: $334,860
Low: $315,380

A difference of $19,480

Whilst FX isn't the most thrilling of subjects, the sooner you begin to think about your money transfers, the more likely you are to make your money go further.

Regards




Jon Sermon
HiFX
 
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