The Pound posted a fresh three-and-a-half year high against the Euro.
• Sterling / Euro grows and grows – fifth consecutive 3.5-year high.
• BoE Dove says stimulus may stop – Adam Posen: “enough for now”.
• Spanish PM announces new €65 billion austerity – damaging to growth prospects.
• FOMC deny QE3 – global stocks sold, risk-rally non-existent.
• Australian Unemployment rises – Antipodeans plummet.
The Bank of England Monetary Policy Committee’s most dovish – some would say most ‘realistic’ – member gave an interview to the Kent Messenger newspaper yesterday in which he suggested that the Central Bank’s easing cycle was nearing an end. Posen described the asset purchasing target as, “enough for now,” and went on to say that the situation with the UK economy is, “not great but not as terrible as some people make it out to be.”
Posen urged banks to lend more to smaller businesses to help stimulate growth, but lamented on the, “extreme caution” that they were exercising, which he felt was harming UK recovery efforts. Taking into account the fact that Posen has been the most consistently pessimistic member of the MPC, it seems likely that the BoE will be adopting a wait-and-see approach for the rest of the year as the limitations of further monetary easing measures appear to have been reached.
The Pound posted a fresh three-and-a-half year high against the Euro for the 5th day on the trot yesterday as Sterling continued to benefit from defensive inflows from the Eurozone.
Yesterday morning Spanish Prime Minister Mariano Rajoy announced a series of tax hikes and spending cuts that will be implemented in return for the banking sector bailout deal. The new measures will seek to slash €65 billion from the Spanish budget deficit.
The new measures include: a €3.5 billion public administration reform, a “drastic reduction” in the number of local public companies, “corrective mechanisms” for regional spending, radical civil servant salary cuts, 20% drop in political party and union funding, and a VAT rise from 18% to 21%.
The Euro has been hurt by the announcement as investors feel that the measures will only add to the already-gruesome self-defeating nature of harsh austerity in Spain. Duncan Weldon, senior policy officer at TUC, commented that additional “austerity in this case is especially crazy.”
As we saw yesterday – and throughout the majority of this year in Greece – political uncertainty is not a turn-on for investors. Keeping this ‘insight’ in mind, it is worth pondering what consequences Rajoy’s U-turn on VAT could have on his future relationship with the Spanish people. During his election campaign Rajoy explicitly criticised VAT hikes, describing them as damaging to growth because of their negative impact on consumer spending. Francisco Longo, professor of governance and public affairs at ESADE stated that:
“These reforms are completely contrary to his pre-election programme, and could have an important political cost for him. He has an absolute majority, but we have seen in other countries that even governments with absolute majorities can fall quickly.”
In more news of a political nature, a headline which could send shivers down the spine of many Italian citizens, Silvio Berlusconi has announced that he will be running for Prime Minister in the next Italian general election. Owing to the fact that in his 8 years of power Berlusconi barely managed to muster up any economic growth, markets will not be filled with excitement upon hearing this revelation. When Mario Monti announced that he would not attempt to stay on longer in the position, Euro sentiment dropped, surely this is the worst possible development to come from Monti’s intentions to step down?
The US Dollar appreciated by over a cent against the Pound yesterday as the FOMC meeting minutes dealt QE3 bets a blow. Markets had anticipated the hint of further monetary stimulus which could have given rise to an increase in global risk appetite. However, the Fed’s hawkish tone suggests that the world’s largest economy would have to deteriorate further before the Central Bank would seriously consider expanding its asset purchasing target.
With riskier assets not receiving the boost that they sorely needed, it was the US Dollar that soaked up the majority of investments last night as markets moved with an extreme air of caution. US, Asian and European stocks all fell following the news and the Euro to US Dollar exchange rate reached a fresh 2-year low.
Despite the direction set out in the FOMC minutes away from Central Bank stimulus, the view that QE3 could rear its head later on in the year still persists:
“It doesn’t change my overall view that QE3 is going to happen later this year or the beginning of next year. But in the short term this was a disappointment,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets.
The Pound has lost out on 0.7 cents to the Canadian Dollar during the past 24 hours as the commodity linked currency profited from a rise in the price of oil – Canada’s main export. The ‘Loonie’ also reached a 1-week high against the US Dollar in the afternoon due to the crude oil price hike.
The Pound is currently trading around a cent stronger against the Australian Dollar than in it was during the minutes preceding the Australian employment data releases. The Unemployment Rate grew from 5.1 to 5.2% as the Australian economy shed 27,000 jobs in June. In response to the Australian labour market showing signs of weakness, the Australian Dollar was hit hard posting negative gains against the majority of its currency peers.
The major worry for the Australian Dollar is that, following the weak employment data, the RBA may decide to try and stimulate growth through an interest rate cut. The ‘Aussie’ currently benefits massively from a strong interest rate differential as its benchmark rate stands at 3.5% which is well above the Euro (O.75%), Pound (0.50%) and US Dollar (0.25%). The Australian Dollar would lose a lot of desirability, and would be set to depreciate further, if it was subject to a rate cut from its Central Bank.
New Zealand Dollar
The New Zealand Dollar has also lost out by over a cent against the Pound, as the New Zealand Performance of Manufacturing fell 5.6 points during June from 55.8 to 50.2. The New Zealand Dollar was sold following the result as markets were unwilling to invest in an uncertain manufacturing sector. The ‘Kiwi’ Dollar then followed the ‘Aussie’ in losing ground to the majors in the aftermath to the weak Australian employment data.
Outlook for the New Zealand Dollar hinges on Chinese GDP growth data tomorrow.
Data Released Today
July 12th 01:30 AUD Australian Unemployment Rate (June) 5.2%
July 12th 05:30 EUR French Consumer Price Index (YoY) (June) 1.9%
July 12th 08:00 EUR ECB Publishes July Monthly Report
July 12th 09:00 EUR Eurozone Industrial Production (MoM) (May) 0.0%
July 12th 18:00 US Monthly Budget Statement (June)
- The Pound rises to a fresh two and a half year high against the Euro and rises to a near 14-year high versus the Dollar
- The Pound reached a fresh three and a half year high against the Euro
- Pound to Euro, US Dollar exchange rate: The Pound to Euro exchange rate reached a fresh three-and a-half year high
- Pound to Euro Exchange Rate Forecast: The Pound to Euro exchange rate reached a fresh three-and-a-half year high of 1.2627
- The Pound to Euro exchange rate reached a three and a half year high on Monday of 1.2443 as general elections in France and Greece left financial markets reeling.