15:37pm Tuesday 22nd June 2010

The budget announcement earlier this afternoon has proved to boost the Pound against both the Euro and the US Dollar in the first few hours of post-budget trading. At 3.00 pm this afternoon Sterling had gained reaching mid-market rates of 1.2054 against the Euro and 1.4813 against the US Dollar. Speak to your broker to take advantage of a strong Pound this afternoon for any upcoming transfers.

There can be no certainty over how long these rates will last but the initial response from the markets seems to suggest that investors have gained confidence in Sterling following the ‘firm but fair’ measures that Osborne has introduced to reduce the deficit. Early signs show that Osborne’s budget has convinced investors that the UK now has a credible plan in place to reduce the deficit and move on to recovery. This should also crucially help to protect the UK’s top AAA credit rating which is fundamental to recovery and stability – although the state of the markets tomorrow and beyond will give a clearer picture of if investor confidence is short or long term. Sign up to our daily news to be updated tomorrow. 

Summary of the main budget policies:

Tax

VAT to rise to 20% from January 2011
Capital Gains Tax to rise to 28% from midnight for higher rate tax payers
Capital Gains tax to remain at 18% for basic rate tax payers
Personal income tax allowance to rise by £1,000 in April to £7,475
Higher rate income tax rate remains frozen until 2013/2014
No tax increases on alcohol, tobacco or fuel
Higher rate income tax rate remains frozen  until 2013/2014
National Insurance threshold to rise by £21 next year

Business

Corporation tax cut to 27 percent next year
Small companies’ tax rate cut to 20 percent
UK bank and building society levy to be introduced from 2011

Welfare and Public Sector

Welfare cuts worth £11 billion by 2014/15  

Child benefit removed and tax credits reduced for families on an income of more than £40,000

Public sector pay to be frozen for two years
Basic state pension to be linked to earnings from April next year
Spending and budget reduction
Government spending will be £637billion in 2010/2011
Government spending will be £711billion in 2015/2016
Deficit to fall to 1.1 percent of GDP by 2015/2016 from 10.1 percent in 2011

Currency Report by Nigel Hodges.

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Yet more volatility has ensued since our last weekly blog. The Pound has reached its highest rate against the Euro since 2008 and on Thursday bought further data to add to the current melting pot of instability as both the Bank of England and European Central Bank released data and held press conferences.

For those clients buying property in Europe and doing a GBP / EURO exchange, the rates are still very favorable with the rate being 1.2030 at 4pm last Friday. No one can be sure how long this will last or how long it may be before the Pound also weakens. Nick Clegg, the UK Deputy Prime Minister is due to speak in Madrid today about the effect that the Euro-crisis may have on the economy and is expected to label this as the biggest threat to UK recovery.

Risk of recovery therefore is high on the UK agenda. Recovery is still weak, despite the enormous monetary stimulus of the "quantitative easing" program. Yesterday the Bank of England announced that interest rates have been kept again at 0.5% for the fifteenth month in a row being maintained at the same rate since March 2009. Inflation is also not looking good as it has accelerated to reach twice the Central Bank’s target rate.

It’s not all bad news however as the housing market in particular is picking up. Housing data released last week revealed that prices are now within 10% of their 2007 peak. The strong talking we have been hearing from our new Prime Minister on budget cuts although austere is likely to boost the confidence of investors and suggest that the UK and the Pound are being decisively led.

It is also important to remember that other nations around the world are at varying stages of recovery and the UK is not alone. The new Japanese Prime Minister has said that Japan’s ‘public finances have become the worst of any developed country’ and that a restructure is desperately needed to prevent the scale of their debt causing a Greek style crisis. On the other side of the coin, nations such as New Zealand are raising their interest rates since the onset of the crisis in 2008 indicating recovery.

Unfortunately, the only certainty at the moment is uncertainty. The currency markets are seeing unprecedented amounts of volatility. If you need a foreign transfer for your property deal, make sure that you speak with us at Currency Solutions and manage your risk and maximize your profit effectively. This may include fixing a rate for the future, moving part of the total amount now and waiting to see how the markets pan out or setting automatic target rates and buying levels.

Nigel Hodges www.currencysolutions.com

Last week saw the phrase ‘double dip recession’ begin to make its way into economic reporting on a serious level. Whether there will be a second wave of a more severe global recession has been a hotly contested topic.

At the heart of the trouble lies Europe. There has been great volatility in the Euro rate and it dropped to its lowest against Sterling in over eleven months last week. Whilst there has been some identifiable positive market shifts in response to moves taken by the Eurozone to steer up confidence these have crucially been short lived. The effect of the original announcement of the near 1 Trillion Dollar rescue package for example only really benefited the Euro for one day. The conclusion on the part of investors seems to be that the problems are deep set and structural – however much money is pledged to help failing nations is insufficient without greater structural reform.

There was more bad news for Europe last week, as Spain and Italy became further embroiled in the crisis that began with Greece. Both nations approved their own intensive budget cuts - the Italian Cabinet for example approved 24 billion Euros of cuts to bring Italy’s deficit within the EU limit of 3% by 2012. Spanish stocks tumbled as it was also revealed that the Bank of Spain acted to give its first Government bailout (550 million Euros) to one regional lender Cajasur.

The crisis and its effects are far from limited to the Eurozone. In the UK, the new Chancellor has outlined initial plans to make 6 billion Pounds worth of budget cuts as the deficit desperately needs reducing and the scale of debt in the UK is staring to be directly compared to Euro nations.

The weakness in the Euro has caused the Dollar to rise and rise. It has been reported that multi-national companies on the scale of McDonalds and Coca Cola are Dollar’s could be facing negatively affected earnings as a large proportion of their income is generated outside the US and denominated in currencies that have all fallen against the Dollar.

The story however is not one sided. Rather than the crisis kick starting a second recession dip, the OECD’s chief economist has forecast that the weakening Euro will actually help European exports and with time this will lead to recovery. The luxury goods label Burberry is an example of one company who have reported increased profits on the back of the crisis.

There are also worldwide discussions taking place regarding banking regulations and whether these should be tightened. Whilst the Chairman of the US Federal Reserve has stated that banks must be kept independent of political meddling, the situation in Europe is likely to lead to upfront levys on banks to help support struggling nations. More banking regulation may also help to prevent the second recession dip.

For currency trades, the market is still exceptionally volatile. This is a great time for GBP/EURO and USD/EURO transfers. Speak to your Currency Solutions broker to make sure you catch the rate as it spikes – or can minimise your losses if you are selling Euros.

Nigel Hodges www.currencysolutions.co.uk

Seismic shifts have taken place since our last blog – transforming the political landscape of the UK, not just with the creation of a new Government but also with the dawn of a new form of coalition politics.

The Pound has been through a befittingly up and down week. There was an unexpected Sterling surge right up to voting time which faded away with the uncertainty in the results, spurred on by Mr Brown’s prolonged stay in Number 10 Downing Street. Although opinion polls began to suggest a hung Parliament fairly early on, the show of unity between Cameron and Clegg in sealing the pact of the coalition deal has been remarkable. Perhaps Cameron understood that investors and markets needed to see strong decision making (indicating a Government able to assertively pass measures to reduce the budget deficit). The Cabinet was chosen on Cameron’s first day in office and, although there have been some rumblings amongst backbenchers, there have been no major public dilemmas so far.

Since the coalition deal was put in place, the Pound has been more affected by the usual releases of data and like nearly all world currencies at present : the ever deteriorating situation in Europe. There have been three particularly poor UK figures for the new Government to deal with; unemployment figures, inflation figures and the trade deficit. Inflation came in at over 1 percentage point above the Bank of England’s target. The trade deficit refers to the fact that the value of March’s imports exceeded exports by £3.7 billion (up from £2.2 billion in February). This did not match up with the expectation that the decline in the Pound would drive up UK exports and consequently, after the data was released, the Pound fell by nearly two cents against the Dollar.

In terms of the ongoing forecast with the new coalition Government, investors are likely to be keeping a keen eye on how well spending cuts are being implemented to reduce the deficit. The reaction to the upcoming emergency budget will be crucial. Hype that Labour have left the nation’s finances in a deprived state is unlikely to implore the greatest confidence, although the most important issue is likely to be that the coalition Government does not begin to part at the seams.

In truth, any electoral impact has been overshadowed by what is happening in Europe which has kept the Euro at its weakest levels against the Dollar in four years and  looks set to continue. Significant steps have been taken by the Euro-zone to try and protect the Euro. First, Euro-zone nations pledged a near $1 Trillion deal to prevent other nations finding themselves in the same situation as Greece but this only gave any real support to the Euro for a day. On Tuesday night, traders were alarmed by a sudden ban on naked short selling and naked credit swaps by Germany’s financial regulator. The decision bans speculators from bets against European Government bonds and banks – in essence preventing them from both exacerbating and profiting from the debt crisis. However, this is a cause for concern to investors who may not be able to hedge their European holdings or sell assets as the region’s debt crisis worsens and has in fact caused the Euro to plummet.

German Chancellor Angela Merkel has spoken-out about the deep Euro crisis, stating that it is the greatest crisis for Europe in decades and the Euro itself is in danger- requiring the drastic steps which are being taken to address exceptional volatility.

The US Dollar is the one currency sitting strong and mighty as it benefits from all this uncertainty. If you have US Dollars to sell or Euros to buy, the rates are in your favour; if your transfers are occurring the other way round, there is still a need to contact your broker. Now is the time to maximise profits or minimise losses depending on the currency transfer you require.

Nigel Hodges www.currencysolutions.com

As Greece erupts with protesters storming the Acropolis and the Parthenon, the stage is set for the economic tragedy to spread. Greece is sitting at the epicentre of a storm of increasing debt woes spiralling across Europe.

On the morning of writing this week’s blog, the Euro has stooped to a one year low against the US Dollar and a nine month low against Sterling. This is great news for those buying Euros who can currently achieve the best rates of exchange seen for months. If you are a Euro-buyer it makes sense to consider fixing the rate which can be discussed with your broker.

However, the Euro’s fall is also symptomatic of increased fears that other nations may follow in Greece’s wake.

To start with Greece - worldwide traders and investors do not have faith that the 110-billion Euro rescue package from the EU and IMF which was formalised over the weekend will actually save the nation. The problem is that in order to secure the loan, Greece have been tied to agreeing to a range of severely unpopular budget cuts and tax rises. Protesters have taken to the streets with both public and private sector strikes taking place. Schools, hospitals and airports are paralysed. This does not bode well for any kind of clear-cut implementation of the rescue package.

Like all tragedies, the doom is escalating with a force of its own. Economic experts are predicting that more debt crisis management will be required across the Euro-zone. On Tuesday, Spanish Prime Minister Luis Rodriguez Zapatero stepped into the spotlight to fervently deny rumours that Spain will be the next to seek financial rescue, as ‘complete insanity’. However, Spain and Portugal had their debt rating downgraded last week by Standard and Poor’s. This had an immediate affect as investors offloaded Spanish stocks and bonds and today Moody’s placed Portugal’s sovereign debt on review for a possible downgrade. Investors are suggesting that Ireland and Italy could be the next in line.

Are the UK and the Pound safe? Last week it was revealed that the total UK Government borrowing for the last financial year was £163.4 billion. Whilst Sterling is benefiting from the current weakness in the Euro, our general election is set against the backdrop of an economic meltdown in Europe. This must act as something of a distant warning - protecting the UK’s AAA credit rating will be an absolute priority for the new Government. As the credit rating is dependent on the perceived ability of the Government to enforce its deficit reduction plans, who the Government will be and with what level of parliamentary majority (if any) could be very significant; there lies an unpredictable week ahead.

Nigel Hodges www.currencysolutions.com

Economic growth in the UK and Government borrowing have been hot topics since our last weekly blog as an unusually hefty amount of data was dished out for dissection.

Although there is no avoiding that the current two main staples of any currency connoisseurs diet, Greece and the UK election, have been once again casting their influence, last week was also remarkable for the unprecedented amount of UK key data and statistics released. But how much effect did these have?

There were three particularly bad data releases that stood out for the UK economy. We learnt that Government borrowing came in at a total of £163.4 billion for the last financial year, which is the largest of any UK Government in peacetime. Secondly, GDP rose at only 0.2% in the first quarter rather than the anticipated 0.4% (although it is important to say this could be revised up). Lastly, unemployment is at a sixteen year high of 2.5 million. The overall conclusion gleaned from this has been that the UK economy has grown only half as much as expected by economists in the first quarter.

Seem like depressing reading? This poor set of data should in theory be bad news for the Pound. The expectation is that such statistics undermine investor confidence. However, Sterling has been doing quite well so far in spite of these poor figures against certain other currencies, in fact reaching relatively high levels against the Euro with many clients choosing to fix the rate as it peaked.

The reason is that weakness in the Pound has in fact been masked in the exchange rate by the even greater weakness in The Euro, which is still being haunted by the spiralling effect of Greece’s debt crisis and the more recent down grading of Spain’s credit rating. There is an imminent danger that other EU countries  may experience a similar fate which would have serious consequences for the Euro. If this is the case and the Euro continues to get even weaker, there is a chance that this will have a knock-on effect on the US Dollar; money may well flow away from the single European currency and into the Dollar as investors seek a safe-haven currency as an alternative. In turn therefore, Sterling’s current vulnerability may very well reveal itself in its rate against the Dollar, if not against the Euro.

So currently Sterling’s should-be weakness is being disguised somewhat by larger events in the worldwide currency markets. However, the new UK figures may rear their ugly head back into the limelight as they happen to have landed in time for the third and final televised electoral debate on the all-encompassing topic of ‘The Economy’ where they will no doubt be dissected. Sterling is far from safe yet.

Nigel Hodges www.currencysolutions.com

Volcanic ash-clouds, alleged banking corruption and a live political battle; the past seven days have been an all too perfect example of world events manipulating currency markets.

As day upon ash-sodden day the European airline crisis has deepened; a further cloud was cast over global economies by the Goldman Sachs investigation. The Pound’s own weakness has been somewhat masked by the fact that fears surrounding the Greek rescue plan have continued to simmer, keeping the Euro in a similarly weakened state.

In the UK however, there is nowhere to escape the e-word. Last Thursday’s ninety-minute televised debate has been monumental in affecting opinion polls and certainly the focus of media hype. The instant surge in the polls for the Liberal Democrats has opened things up as three-horse race and Nick Clegg’s popularity has apparently reached dizzy heights. Most importantly for the currency markets however, this gives ever-more indications of a hung parliament come May 6^th.

A hung parliament is not likely to bode at all well for Sterling. The big issue concerning the city is that without clear leadership and a plan to reduce the countries budget deficit, Britain’s AAA credit rating might be put at risk. Concerns over a hung parliament are already affecting Sterling investors – the pound fell by one percent in the two days following the debate last week.

A lot of our clients here at Currency Solutions are therefore asking their dealer the golden question: what will happen to Sterling after the election? Do I buy now or do I buy later? A hung parliament would certainly not be good for Sterling but of course there are three weeks before voting day and no-one really knows what the election outcome will be. The only certain answer to this question then is that Sterling is likely to continue to experience great volatility in the run-up and after-math of the election. The exchange rates are expected to chop and change as frequently as the polls, and for that reason one of the safest bets, as in all times of volatility, is to fix an exchange rate now for use over the coming months, and wait and see what state Sterling is in after the storm has passed.

Tomorrow is a very important day for Sterling. There is a host of key economic data and news being released, including the total borrowed by the Government in the last financial year. This happens also of course to tie in with round two of the electoral debate. Will it be Sterling that takes the biggest beating?

Nigel Hodges http://www.currencysolutions.co.uk

Rather than meditating on the past weeks theatrics on the forex stage, it seems far more worthwhile to focus on the Euro-Zone in this week’s chapter of our currency exchange diary. An unexpected and sizeable aid package arrived on Greece’s front door and, although it hasn’t yet been signed for, the European currency is already benefiting from investors’ relief.

So here are the gritty details:

Over the weekend, bespectacled Finnish Eurogroup Junker and European Commissioner Olli Rehn presented the media with details of the financial backstop facility for Greece.

As anticipated, the rescue plan will come in the form of bilateral loans from the Euro area member states, in what promises to be an effective economical makeover for the Greek nation. Amounts will be tailored to fit Greece's funding needs over the next three years and The European Commission will act as a conduit and deal with the bilateral negotiations, while the European Central Bank will be the paying agent supplying the dough.

A larger-than-expected 30 billion euros will be the maximum amount of pocket money provided by the Euro area for the first year and each country will contribute according to the ECB capital key. Amounts for later years are yet to be evaluated, but it is reported that there is no upper limit to the commitment. Additional financing from the International Monetary Fund is expected to be formalised today, although Rehn confirmed that analysts’ assumption of a ‘two thirds’ contribution from the Euro area against ‘one third’ for the IMF is a good guess.

If and when Greece requests a loan, the European Commission and ECB will cast their beady eyes over the situation, make an assessment and submit it to the hopefully unanimous approval of the Euro area countries. It was specified in the press conference that cash would be promptly laid out, which conflicts with the fact that other countries need such decisions to be ratified by their parliament. This raises a few questions over the idea of ‘imminent disbursements’.

Developments in the next few days and the ability of Greece to access the market will determine if help is needed sooner than expected.

The next date to watch following this gripping omnibus is the update of the Stability and Growth Plan next month. As there have been no additions to conditionality we can only assume that EU leaders feel Greece have made positive steps towards dealing with their problems.

Of course, this has been a blinding green light for Euro investors in the currency exchange world, easing concerns about the inability of the EU to solve Greece's financing needs. However, it sets a hazardous precedent as the Euro area can ill-afford another similar situation. Pressure on other periphery countries to strengthen financially and for the ECB to maintain a sturdy policy will have increased and the intricacy of this deal and the IMF's participation will keep investors in heavy debate. While it’s clear that Europe want to help Greece, it’s possible that the forex market will only respond solidly when aid is actually disbursed to the country.

In the meantime, keep an eye on any news relating to the situation and for the best currency exchange rates visit www.currencysolutions.com

 Have a great week

Nigel Hodges www.currencysolutions.co.uk

Alistair Darling quite literally upset the apple cart last week by raising taxes for cider drinkers, sending droves of anxious park-loitering teenagers into a confused frenzy. He also decided to show mercy on first time homeowners whilst Londoners with property worth anything upward of a million were squeezed ruthlessly.

So another anticlimactic budget passed by as political foreplay got in the way of what would otherwise have been an event of equal predictability, just far less tiresome. Whilst on the topic of fatigue, the Euro has been on the wrong end of the treadmill for far too long now, so EU leaders have decided to give it a breather by agreeing on an aid program for Greece in conjunction with the International Monetary Fund. The bailout itself could include about £19.8bn, with two-thirds from Euro-Zone countries and a third from the IMF.

The situation is hard to gauge at the moment, Greece have managed to sell bonds to Germany today in an attempt to raise funds and some experts seem to think the ‘non-bailout’ bailout won't solve much in the long term unless the core issues are addressed. However, the agreement lifted the single currency out of its 10 month rut of weeping behind closed curtains, eating chocolate-chip ice cream and watching reruns of old detective dramas. The EUR strengthened to USD1.3399 from 1.3273, reaching a high of 1.3418 in last Thursday’s trading after a dismal start to the week due to the uncertainty of the Greece saga.

Back to the UK, where concerns have festered in the run up to the impending election. There is still a strong belief that it will all end with a hung parliament which, for the youngsters amongst us, means a stalemate - not a medieval-style group execution – though some may argue the latter might be a good way to teach MP’s a thing or two about fiddling expenses. The pound was also driven lower amid speculation Dubai World will prolong the repayment of its loans, hurting earnings at UK banks that serviced the state-owned Emirati company. This week Sterling has benefited from revised UK growth data but further political indecision could weigh it down.

In the past fortnight several indicators pointed towards an economic recovery in the US, which allowed a bullish dollar to push against the majors. However, later in the week Ben Bernanke gave his opinion on the situation, saying he believes that the US's fledgling economic recovery is “not quite ready to take flight” cradling the nation’s eagle in his arms lovingly - but minding his fingers.

Have a great week.

Nigel Hodges www.currencysolutions.co.uk

This week presents the 2010 budget with our enchanting host, Mr. Alistair Maclean Darling… but could this be his last? Aside from having a renowned brand of toothpaste for a middle name, there are many reasons why the Chancellor of the Exchequer will be losing sleep at the moment, what with the uncertainty surrounding the upcoming election.

So what will this all mean for Sterling this week? Some say Darling will sing a ballad sweet enough to rouse the pound into a gentle boogie. It goes a little something like this: Reducing estimates for the UK’s borrowing requirement and upgrading growth estimates on the back of last quarter’s GDP figures (insert predicted estimate for this quarter’s number here).

Although there is a fair degree of uncertainty surrounding the budget, pleasant sounds would provide support for Sterling in the short term. However, it won’t change the fact that the nations political contest is a little harder to predict than the anticipated ‘barbecue’ summer which is set to keep the UK warm for all of three days before it returns to standard grey drizzle.

Now for the Euro, and Greece, and a squabbling group of EU leaders that simply refuse to make a decision on the issue. Chancellor Angela Merkel says that EU leaders shouldn’t be getting Greece’s hopes up with talk of aid, Trichet is slamming his fist on a desk of fine mahogany demanding stringent terms whilst delightfully mustached Greek PM George Papandreou said he’ll turn to the International Monetary Fund for aid if they won’t help him. So it’s another tough week for the single currency in the world of currency exchange, with a fair amount of data releases providing other possibilities of things that can go wrong for the Euro-Zone.

The dollar is looking sharp this week, ruthlessly claiming the spoils of a beleaguered Euro whilst keeping a watchful vulture eye on the Pound. However, it wasn’t all plain sailing for the greenback last week, after the US Federal Reserve held its pledge to keep interest rates low for an extended period, prompting investors to snap up growth-sensitive assets.

Forget President Obama and his health plan, this week it’s all about Ben Bernanke who will be appearing on Thursday, live, in person to thrill traders with anticipation as to whether or not he’ll discuss potential interest rate changes. All will be advised to watch this space.

Have a great week.

Nigel Hodges

Euro-traders will undoubtedly be well and truly fed up with the ongoing shenanigans in Greece. Yes, the nation has a wealth of fascinating historical curiosities and feta cheese tastes lovely in a Chickpea Bourekia – but the whole fiscal collapse just isn’t sitting right with anyone.

Today, fantastically-named German Finance Minister Wolfgang Schaeuble and his French counterpart Christine Lagarde threw cold water on speculation that there will be a decision on aid for Greece at a two-day meeting in Brussels.

Last Monday Nicolas Sarkozy said that he agreed the Euro-Zone should help Greece out. This got the single currency off to an optimistic start to the week whilst the pound also faired well against a subdued dollar. Then UK house prices turned up uninvited with no booze or biscuits and spoiled everyone’s fun.

Worse than expected data sent sterling below the USD1.50 mark but by Friday it managed to move over USD1.52 following news that an opinion poll indicated an outright Conservative majority. Needless to say, if the pound could vote, it would be opting for Tory.

However, the weekend’s polls are once again pointing towards a hung parliament which is not good at all for UK currency. To add to sterling’s woes, Moody’s ratings agency confirmed that the UK’s fiscal position has been subject to “extreme deterioration” - all very scary stuff for sterling supporters.

As for the dollar, the start of the week saw some strength on the back of solid employment figures from the previous Friday. Then things went a bit quiet with not a lot of news emanating from across the pond.

On Thursday traders were treated to a veritable symphony of critical economic indicators including such classics as the US Trade Balance Report and the weekly unemployment claims. Disappointingly though, the day produced a mixed bag for the dollar, leaving it trading lower against majors on the Friday.

This week it will be wise to keep an eye on political polls, chatter and Gordon Brown’s every move as indicators as to which way the election will sway will be critical to sterling’s progress.

Have a great week.

Nigel Hodges

www.currencysolutions.co.uk

Phrases such as ‘better the devil you know’ and ‘the lesser of two evils’ may have been scribbled in the tattered moleskin diaries of a few sterling traders last week. Keeping that theme in mind, an eternity in flames may have provided a more favorable option to those expected to vote this summer, as the British public seem well and truly stumped, which could result in a hung Parliament – which doesn’t bode well for sterling.

However, some believe a weak pound isn’t necessarily a bad thing for the economic recovery, despite a gaping black hole of debt and fiscal infection so shameful, you’d stay at home with the doors locked and the curtains shut tight just to hide it.

Last week saw the pound making depressing nosedives in form due to an unhealthy diet of economic data. Weak weekend polls and another unwholesome helping of the same on Tuesday morning left the pound sluggish as a result of political uncertainty. However, a refreshing dose of PMI data reversed these losses to keep sterling steady before an unchanged decision on interest rates and QE gave rise to a whole lot of nothing on Thursday. It’s advisable to keep a close eye on the political pendulum as the election approaches, as it will have a significant say as to how far sterling will go against other majors in the coming months.

The suspect scent of schadenfreude could be detected outside German Chancellor Angela Merkel's office at the weekend, as the European juggernaut suggested that Greece could perhaps part with a few islands to curb their debts and maybe stick the Acropolis on EBay just for good measure. German newspaper Bild echoed the Chancellor’s discreet intimations with the headline “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!" Comments from French President Sarkozy were a little gentler "If Greece needs help, we will be there" he said reassuringly, whether or not this will be with a wad of cash or a blueprint for an incursion of Crete was unclear though.

Chatter about a Greek support plan kept the euro steady last Monday but it slid on Tuesday as Greece began to outline further spending cuts. By Friday, the ECB decision to keep interest rates at their record lows spun the single currency back into downward descent. However it isn’t looking quite as bad as it was, the markets are breathing easier over the Greek fiasco with new austerity measures viewed favorably. Whether or not a support package will turn out to be a Trojan horse remains to be seen – more on this next week.

Which leaves us with a little room for the dollar, which had a slightly bearish week, ending well with solid Non-Farm Payrolls data. With the Trade Balance and Retails Sales due along with weekly Unemployment Claims and Consumer Sentiment reports, maybe this week’s news from the US will warrant a little more space on our market-shifting update – fingers crossed.

Have a great week

Mutually detrimental – that’s one way to describe the rocky relationship between politics and economics in the UK as the promise of a stalemate in the coming election looms like a threatening rain cloud over the nation’s fiscal picnic spread.

There will be no extra-time, no penalty shootouts and no debatable referee decisions, however there may be a few grown adults crying because a hung parliament means there will be bad times ahead for the pound.

In fact, the nation’s fiscal complexion is so repulsively hideous not even the politicians can bear to stare it in the face. So for a realistic appraisal of what’s going on (at least in the forex market) you’ll always have this blog to depend on.

Last week wasn’t a good one for UK currency, with trends looking bearish from the off. In fact, it wasn’t much better for other majors either, with the euro still banging its head against the wall over Greece’s problems and the US dollar down due to its stagnant jobs market.

On Tuesday gilt figures rose and BoE Governor Mervyn King said the UK's recovery was fragile and risks to the MPC's central view of a gradual recovery remained to the downside. So the pound slid once again.

The euro, however, was a little steadier on the tightrope after a newspaper reported Dubai provided more funds to Dubai World, easing concern that European banks will incur losses on loans to the Gulf emirate.

As to the dollar, restrained consumer spending and home sales in the US underscored Federal Reserve Chairman Ben Bernanke’s comments on Wednesday that the economic recovery is “nascent” and would still require interest rates near zero, keeping the greenback on a low.

By Friday we were all a bit tired of hearing how bad things were for the pound. Although UK GDP figures came in above expectation for the 4th Qtr at 0.3% growth (against 0.2% forecast), sterling continued to slide.

Currently there’s plenty happening that doesn’t work to the pound’s advantage. As well as political and fiscal fretting, the potential purchase of AIG from Prudential is causing large negative M&A flows out of sterling and into the dollar. Today UK currency is ominously fragile and it would certainly be wise to keep an eye on its movements for anyone looking to profit at sterling’s expense.

Feel free to give us a call on +44 (0)207 740 0000 for some sound forex advice or a great bank-beating rate. For more information, visit www.currencysolutions.com.

Lets hope for a more optimistic week!

Nigel Hodges

You don’t see much of sterling in the headlines these days. Maybe it’s the lack of outrageous award-ceremony outfits, or perhaps it’s just a bit run down and worn out by all the fiscal misery and bad weather of late.

This was certainly the case last week and it was only the plight of the euro that kept sterling steady on Monday morning, as it waited with baited breath for BoE Governor Mervyn King’s two pennies-worth in Wednesday’s minutes. Whilst a rise in unemployment benefit claims kept sentiment shaky towards the pound, Wednesday’s policy meeting showed a unanimous vote to pause quantitative easing, which kept sterling firm against the euro on Thursday. Friday however, was a day for the dollar.

The greenback took a bank holiday on the Monday, having ended the previous week looking fairly bullish against the majors. Further tightening of Chinese monetary policy was expected to slow the global recovery which led investors towards the safe-haven US currency. As Euro-Zone concerns waned, the dollar slumped slightly on Tuesday but picked up midweek in anticipation of PPI figures, unemployment claims and the Philadelphia Fed Manufacturing Index.

The Federal Reserve then went and surprised everybody, including themselves, by raising a key interest rate which sent the dollar surging against the pound on Friday - which slumped to a nine month low against the greenback. The Federal Reserve statement said it would increase the discount rate it charges banks from 0.50% to 0.75%. This was a signal for further tightening and that the Fed Funds rate may well be next.

So last, and probably least as well, the euro continues to thrash around violently in its sleep, troubled by nightmare’s about Greece, wondering whether or not the EU will sort it all out. Concerns lightened after reports out of Brussels suggested that European finance ministers may start playing hard-ball with Greece, possibly by stripping them of their EU voting powers and sending them to bed with a firm scolding and no supper. Greek unions called off a strike of tax collectors, farmers removed their barricades and a fearful silence filled the air. European finance ministers have given Greece a one-month reprieve (until March 16th) to show its deficit reduction plan was being rolled out effectively.

The week ahead could be an interesting one, with some key data due for the UK including house prices, industrial orders and consumer confidence. If you’d like some valuable tips on what to do with your currency, then just give us a call on +44 (0)207 740 0000 for a free quote and a chance to chat to one of our dedicated currency experts. For more information, visit www.currencysolutions.com.

Have a great week.

Nigel Hodges

It’s all getting a bit fraught in the eurozone at the moment, after a fruitless EU gathering last week failed to produce any concrete solution to the problems in Greece.

Maybe they were too busy catching up on old times, watching the new series of 24 or even enjoying a light-hearted game of Scrabble. Either way, Wednesday’s coming together didn’t do a great deal to alleviate investors’ fears and the euro ended Friday’s session on a downer having bobbled hopefully throughout the week.

German politicians from the Free Democratic Party made their feelings known about a possible bailout for Greece, saying it would be akin to “helping an alcoholic with another bottle of schnapps.” The questions remains; if Greece get a drink on the house, then surely the likes of Portugal, Ireland, Italy and Spain should expect to be in on the round as well. As it stands, the uncertainty could see the euro slipping further this week with seemingly not a lot of good news on the horizon.

Meanwhile in the States, the dollar looked a little more self-assured, optimistic and alarmingly cheerful/manically apprehensive after positive US unemployment data provided a boost. It proved to be a positive week for the greenback, as many traders opted for the safe-haven currency due to the trials and tribulations of the euro and the fact that sterling still carries a fair amount of unwanted baggage – fiscal, political and a list of other ‘cals’ that’ll probably exceed our word limit.

However, it wasn’t all doom and gloom for the pound - focus moved away from a murky BoE report and shifted back to euro weakness, which propped up sterling to finish Friday in good shape.

As for the week ahead, Monday sees the US taking a holiday (President’s day) whilst February house prices promise to get sterling’s feet moving. Wednesday brings us the BoE meeting and anything euro related will be closely watched due to the recent low-budget and badly-subtitled Greek soap opera.

If you prefer pleasure to pain and simplicity to strain then it’s worth giving us a call to find out how much you can save on your currency exchange transactions this week. Just call +44 (0)207 740 0000 for a free quote, or visit www.currencysolutions.com.

Have a great week.

Nigel.

As the snow begins to fall here on the Thames you’d be forgiven for believing that the UK is caught up in a whirlwind of unnecessarily spiteful weather out of which we may never emerge.

It felt a little something like that in the Euro-Zone last week, as the deficit flies buzzed around the problematic countries that are currently giving the euro plenty of grief. Interestingly enough,  the troublemakers have been dubbed the ‘PIGS’ (Portugal, Italy, Greece and Spain) as it is these nations that are expected to continue kicking dirt in the direction of the euro which this week could be to the detriment of the pound due to risk-aversion.

Last week sterling wallowed in its own pity as a second wave of post-holiday blues crept in. Investors weren’t buying the pound on Monday; instead they turned extra speculative and began a patient wait for the BoE decision to come out later in the week.

Meanwhile the dollar and the euro made some ground against the pound, the former still beaming after the previous Friday’s unexpectedly strong US growth and the latter was lucky to get anywhere at all with the weight of Greece and Portugal’s fiscal problems on its back.

A report on Tuesday showed that manufacturing activity came in at a 15-month high, which gave sterling a brief boost. In Australia, news bulletins reported that the Reserve Bank of Australia decided to keep interest rates steady at 3.75%, while it was highly forecasted that the bank will raise borrowing costs by 25 basis points to 4.00%. However, many failed to register this information, instead transfixed by the web-surfing habits of a particularly unfortunate banker who was fired as a result of his antics.

Of course, here at Currency Solutions we always have our eyes on the ball, and on Wednesday the pound made a short-lived recovery before once again slipping after a weaker-than-expected reading of the UK services sector. Meanwhile the dollar fell against the euro and The European Commission put their heads together to try and resolve the Greek issue.

Thursday provided us with the long-awaited BoE decision, which was to pause stimulus. This didn’t do a great deal for the pound adding to concerns about sterling and the UK's fiscal position.

The dollar hit a seven-month high against a host of currencies on Friday, as rising investor risk aversion on fiscal problems in some Euro-Zone countries made the safe-haven currency a far more attractive prospect for traders .

The week ahead seems like it will be fairly quiet in terms of data releases, if you see a rate you like and want to keep it that way for a future transaction, give us a call now on +44 (0)207 740 0000 for a free quote or visit www.currencysolutions.com

Have a great week.

Nigel.

Lukewarm would be the word to describe the happenings of the last seven days as the UK floundered in the aftermath of underwhelming anti-climax, and no, we’re not just talking about Andy Murray.

Finally Britain dragged it’s heaving, half rotten carcass from the pits of recession, but seemed to slump to a halt in the doorway. This all occurred as data revealed that Gross domestic product expanded by 0.1% between October and December, which was well below analysts' forecasts of 0.4%. So, as leftover fireworks from New Years Eve headed for the skies only to make a tepid detonation, it seems we made it, but only just. 

So, what did this mean for the pound? Disappointing data saw sterling take a nosedive on Tuesday afternoon. David Tinsley, UK economist at National Australia Bank said that "It's not impossible to imagine the first quarter returning to negative growth on the basis of today’s data”, which, along with a mound of political uncertainty, doesn’t bode well for the pound.

The euro currently has a couple of weak links, namely Greece and Portugal, whose economic issues continue to hamper the single currencies progress. The euro did however touch a session high on Tuesday whilst the dollar and yen rose broadly as investors cut exposure to riskier assets. This all followed China’s implementation of a planned increase in required reserves for banks.

On to Wednesday, and sterling crept up against a broadly weaker euro to recover from the previous day’s fall which was due to weak GDP data. The dollar wasn’t looking too shabby either, as it rose slightly against major rivals ahead of the US Federal Reserve's first policy meeting of the year.

It seemed investors felt risky one day and timid the next, as sentiment rose and fell throughout the week. Andrew Sentance gave sterling some firm support later on Wednesday, when he said that it may be difficult to keep inflation on target if import and services prices keep rising. The focus on inflation strengthened the view that the BoE may opt to pause asset purchasing under its quantitative easing programme this week, we’ll just have to wait and see.

So by Thursday the dollar was strong after hitting a 6-month high against a lowly euro, deflated by the prickly situation in Portugal. These concerns carried on through to Friday as sterling rode its luck against the euro. The dollar ended the week well after the US Labor Department reported that the number of initial jobless claims had reduced.

Looking ahead, this week’s big BoE event will keep cautious investors from taking any major risks. If you’re sensing now is the right time to make a currency transfer and you want to do it at the best rate possible, get in touch on +44 (0)207 740 0000 for a free quote or visit www.currencysolutions.com

Enjoy your week.

You have to keep your eye on the ball in this market and that’s exactly what we’ve been doing here at Currency Solutions of late, as the pound jumped, the dollar ducked and the euro had a bit of a sulk having been let down by Greece, whose FTD (fat terrifying debts) could prove to be contagious and extremely unattractive to punters on the FX dance floor.  

In case you didn’t feel the banks were getting a strong enough kick up the backside, US institutions took one this week after US President Barack Obama decided they’ve been getting too big for their boots of late - undoubtedly very expensive, bonus-funded boots at that. 

"Never again will the American taxpayer be held hostage by banks that are too big to fail” cried the US President, after which the dollar drooped shamefully to end a tepid week of losses against the pound.  

A healthy breakfast of strong UK housing data saw sterling bright and breezy on Monday morning, whilst the sorry state of the euro suggested it can only have had time to grab a less-than-generous helping of stale muesli. This made the dollar appear a lot healthier than it actually was whilst the yen carried as much optimistic morning oomph as one of those impressive yet irritating morning joggers. 

Tuesday delivered the horrifying news that a much-loved British treasure was to be swallowed up by a large American buyer. Goodbye Cadburys, hello Kraft… well known in the UK for their processed, plastic, orange cheese - which is sure to ease the fears of any anxious dairy milk enthusiasts. The outcome? Sterling saw major gains as the euro dropped to a four month low and the dollar followed suit allowing the pound to hit a one month cable high, every cloud… 

The pound’s progress against the euro continued on Wednesday, following chatter that the central bank's quantitative easing would pause next month. Consumer inflation from Tuesday fuelled the fire and excitement filled the air: Then BoE Governor Mervyn King poured water all over the UK inflation spike in his first major speech of the year, possibly branding himself as something of a killjoy... 

Then we hit Thursday, which saw the pound’s fortunes reverse as those pesky investors decided to stay coy before the release of UK public finances data later that day. They may have also remembered the small matter of the countries dismal economic circumstances as well as the financial implications of the impending scapegoat selection process we call a general election.  

So the week left us with mixed signals as to what lies ahead for the majors, as the pound’s gains were capped and the euro and dollar looking fairly unpredictable. If you are hoping to surf the markets like a true pro this week, do get in touch with us for any advice, information or just a very good rate, by calling +44 (0)207 740 0000 or visiting www.currencysolutions.com  

Have a great week.

As the country thaws out and normal service resumes after another snow-shaken week, it’s time to start thinking about how the market will be shaping up as we trudge towards the end of January 2010.

Last Monday saw the pound climb against the dollar and the euro, however gains were capped as investors remained wary of the UK's mounting debt and political uncertainty. The dollar was certainly on the backfoot as the market responded to disappointing US non-farm payroll data released the previous Friday.

In addition to the market data the continued speculation surrounding Cadbury and the possibility of improved offers lent sterling some support. French Industrial Output came in stronger than expected which gave the euro a lift against the dollar.

Tuesday saw further selling of the greenback as the pound moved into pole position following a round of good data. The British Chambers of Commerce’s economic survey for the fourth quarter of 2009 noted that there had been improvements in many areas of the British economy, particularly in manufacturing.

Retail sales figures for December were also uplifting, but it should be noted that there may have been a fair amount of front-loading prior to the VAT increase and January’s figures are liable to drop. Another poll from the Royal Institution of Chartered Surveyors reveals that UK house price growth slowed in December, marking the first fall since February’s low point.

The pound made significant gains against the dollar on Wednesday following comments from a BoE policy maker whilst the dollar itself struggled against sterling. Things weren’t looking so good for the euro, dragged down by Greece’s not so healthy fiscal complexion, an issue that continues to hamper the progress of the European currency this week.

Elsewhere, risk appetite took quite a flogging after China’s decision to increase their required reserve ratio (RRR) for its commercial banks by 0.50%, thus obliging financial institutions to hold onto more of their deposits as reserves.

By Thursday the Aussie was up and the US dollar still skulked quietly as sterling recorded a one-month high against the greenback. The euro also traded higher against the dollar after hitting a high last reached back in December.

The market mover on Friday was a rumour that circulated the Far East indicating that the German Chancellor, Angela Merkel, was ready to resign her position. The rumour was swiftly denied by a German Government spokesperson but the damage proved irreparable as the Euro sank quickly.

Onto the week ahead and the pound is looking feisty against a weakened dollar, if you want to find out the best way to get more for your sterling feel free to get in touch with myself and my colleagues at www.currencysolutions.com for a free currency quote or alternatively, give us a call on 0207 740 0000.

Have a great week.

Nigel.

Political drama and a fair amount of snow have made for a chaotic week and the market has been just as animated with the pound anxiously stuttering as a result of the Governments latest bout of turbulence.

The US dollar started brightly on Monday, recording early gains against the pound and the euro, but then later dipped as sterling pulled back. By Tuesday, the pound was still under pressure as jitters surrounding the UK economy reverberated through the market. This allowed the euro to hit a high against sterling, which then settled having risen 0.3%.

Rumors of large-scale repatriation by Japanese exporters pushed the yen higher against US currency, this weighed on the greenback as it struggled against the majors later on Tuesday. The following day wasn’t much brighter for the dollar and the yen, as negative data saw investors turning away from riskier assets.

The pound was dealt a swift blow on Thursday as Prime Minister Gordon Brown fought off an attempt within his party to unseat him. It wasn’t just the Prime Minister who was feeling the heat, as political uncertainty pushed sterling down to one-week lows against the dollar and the euro. However, these worries did ease and the next day the pound made a swift recovery, gaining 0.5% against the dollar.

Meanwhile the euro slipped whilst the dollar also failed to live up to expectations of further rallying at the start of the year as investors awaited US non-farm payroll data.

The Australian dollar went on to touch 1.73 against the pound, the strongest in 25 years, and traded up 0.5% at 1.73 as retail sales climbed 1.4% from October. Since the dollar’s aggressive December rally came to a halt, its progress has been limited and that continued to be the case.

So there’s much to ponder for the week ahead, with UK retail sales output data due later this week and the pound under pressure due to worries about the country’s economy.

For any further advice on foreign exchange, or for an instant quote on bank-beating rates, call +44 (0)207 740 0000 or visit www.currencysolutions.com

2010 is underway and with that comes a fresh new year for the currency markets. Obviously there hasn’t been a great deal to report after the Christmas break but early movements are starting to paint a picture for what we can expect over the next week.

As is always the way with year-end trades, orders are so thin that they can easily cause a large movement in the market. Sterling held it’s own against the dollar from last Tuesday onwards and was up 3% against a soft dollar. However, the pound didn’t fare as well against the euro which was up 5% to trade at 90.29 pence, a month high.

Wednesday saw ongoing debt concerns strike an already thin market and this resulted in the pound hitting a two and a half month low against the dollar. Currency strategists saw any positive sentiment for UK currency immediately washed out by negative factors and the general consensus is that it’s been a challenging year for sterling, despite it’s appreciation against the euro in 2009, which took advantage of the pound’s weakness to touch a one month high at 90.43 pence.

Political risk is likely to be a focus this year ahead of the UK general election, with investors concerned about the chances of a hung parliament which could make it difficult for the government to take steps to alleviate UK debts.

However, some believe there’s every chance that sterling is being undervalued, which could bode well for 2010. The UK economy is expected to return to growth in the fourth quarter of 2009 after contracting in the third, but the proof will most certainly be in the pudding.

So onto the dollar, which has experienced something of a revival towards the end of 2009 after making gains against the euro and the pound. There’s a belief amongst speculators that the greenback could make considerable gains this year, as US investors reduce the share of foreign assets in their portfolio. A December rally saw other currencies struggling against the greenback although it took a slip today as an advance in global stocks and crude oil revived demand for higher-yielding assets.

So 2010 looks to be an interesting one, with economic recovery on the tip of our tongues and a fresh decade ahead.

The festive period is well and truly upon us and with that comes staff increases for the holiday season, which was a contributing factor to the better than expected US payrolls reading the week before last. This gave the dollar room to fight back from recent slips and the greenback hit a five-week high against a basket of currencies on Monday morning.

The euro also picked itself up from lows touched the previous Friday and pre-budget nerves saw sterling fall overnight and come in looking a bit under the weather on Tuesday. The pound’s slip commenced in Asian trading and was instigated by a market order to sell sterling and buy euro. The Dubai crisis reared its ugly head again to contribute to the pound’s decline as stocks fell and worries mounted on Dubai World’s debt restructuring.

US Fed chairman Ben Bernanke poured cold water on the positive non-farm payroll report by pointing out that the job market was “weak” and more sustained evidence would be needed to assure a self-sustaining recovery.

Rolling along to Wednesday and all eyes were on Alistair Darling’s pre-budget report. The looming election and unhealthy state of the UK economy were on politicians’ and economists’ minds and Darling was forced to admit that the recession was deeper than he forecast back in April.

In came a one-time 50% tax on bank bonuses that exceed £25,000 which will expire on April 5th, which will no doubt result in a shed load of bonus payments being made on April 6th. The report also included an increase in National Insurance and a public sector freeze on pay limited to 1%, leaving the ability to halve the deficit within 4 years looking very doubtful.
 
The Fitch downgrade of Greece had everyone flustered and sent a clear message to those with thoughts of spending our way out of recession that debt cannot be escaped. The euro dropped sharply against the dollar as a result and concerns as to whether Eastern Europe could suffer the same fate will not help matters for the single currency.

The biggest gainer in the currency markets midweek was actually the Kiwi dollar as the RBNZ released a hawkish statement to raise the prospect of a rate increase earlier than expected.

Thursday saw the pound recover slightly as the dust settled following the pre-budget report as investors bought the pound back at cheaper levels. The euro was undercut by concerns about sovereign debt in the region after Greece’s credit rating was downgraded. The Aussie reached highs due to positive employment data and the Kiwi was also up after the Reserve Bank of New Zealand said it may begin removing policy stimulus by the middle of 2010.

Which brings us to a cold and frosty Friday morning in which sterling made gains against the euro and yen, but fell against a stronger dollar. A major ratings agency said Britain's top-notch sovereign rating was under no immediate threat, but this failed to alleviate concerns about UK fiscal health.

So this week should prove to be an interesting one as the Dubai plot thickens and speculation on whether we’ll have a white Christmas intensifies. Until next week, wrap up warm.

Nigel Hodges (Currency Solutions).

There were perplexed and apprehensive glances exchanged early last Monday as no one was entirely sure what depth of impact the situation in Dubai would have on the exchange markets.

Both Abu Dhabi and the UAE Central Bank quickly came forward to assure markets of their support for the besieged Emirates State to soften the blow, yet repercussions for ‘fairy godmother’ Western lenders are expected to come around.
 
Other weekend news took a back seat but was largely centered on Japan, where intervention chatter continued to reverberate around the markets and officials maintained their stance on the current volatility in foreign exchange rates.

The Dubai rumpus continued to dominate headlines on Tuesday  although the market contained the news with a steady rally in US and Asian stocks. The Reserve Bank of Australia raised their official rate by 25 basis points to 3 3/4% completing a hat-trick of interest rate rises. However, the Aussie remained subdued with both the decision and the comments that followed widely anticipated.

The strength of Eastern European currencies saw myself and my colleagues at Currency Solutions taking a lot of calls from clients looking to bring back funds from Poland. The euro itself gained across the markets and it has been heavily bought into as an alternative reserve currency over the greenback by Asian central banks and Russia.

The dollars wasn’t up to much on Wednesday having had a good run the previous day, which was largely due to the Dubai fear factor. Restored comfort saw the euro push through the 1.51 level against the dollar, sterling also gained back to the 1.66 level.

It was business as usual in the markets on Thursday as the search for yield gathered impetus. The Japanese Yen wore the loser’s hat, surpassing the US dollar as the currency of choice to sell. The recent stimulus from Japan and verbal attempts to weaken the currency saw the yen finally feeling the pressure.
 
The pound softened a little after UK PMI services data came in weaker than expected at 56.60 down from 56.90 in October and later in the day the ECB announced that they would take small steps to cut liquidity.

Jean-Claude Trichet announced that they will terminate the one year tender in December and that the final tender will be offered at an average policy rate. They also announced that the 6 month tender will end on March 31, gesturing towards a cut in the stimulus program.
 
As Friday rolled in, the dollar lost ground against the Aussie and the Kiwi but gained against the pound and the euro in later trading.

The market awaited payroll and unemployment data from the US which came in a lot more positive than was previously thought, boosting optimism about a recovery in the US and prompted speculation that the Federal Reserve will exit its ultra-loose monetary policy earlier than previously thought.

You said Dubai, our survey said: Correct. Trouble in the UAE towards the end of last week sent a few shockwaves across the currency landscape but Monday painted a different picture.  

The pound was smiling against a subdued dollar early on in the week as a revival in moderate risk sentiment put sterling up 0.7% versus the greenback. The euro was also up 0.1% after figures revealed that the purchasing managers' manufacturing index rose to its highest level in October since March 2008.  

It was all about the US markets on Tuesday as consumer confidence and GDP figures came rolling in. The dollar pushed higher as stocks sold off in Asia on Japanese share sales and even the Canadian dollar had a go, jumping to its highest level in two weeks against US currency as gold and equity markets rose. 

On Wednesday, economists across the UK sang out a chorus of ‘we told you so’ as revised data showed that the British economy shrank by 0.3% in the third quarter compared with the initial estimate of a 0.4% contraction. However, sterling’s blushes were spared as all eyes were on the dollar which took its lowest tumble in over a year.

Minutes from Tuesday’s Federal Reserve’s policy meeting had described the dollar’s decline as ‘orderly’. Needless to say, this was a green light for traders to ditch the greenback, which gave the pound some consolation on a difficult day.  

Then came D-day Thursday in the UAE, which saw sterling fall against both the dollar and the euro. So what was all the fuss about? British banks' exposure to debt problems in Dubai as well as concern over UK economic health was the diagnosis and this continues to affect the pounds performance despite the UEA central bank pledging their support. Dubai moved on Wednesday to restructure its biggest corporate debtor, Dubai World, and delayed repaying some of the company's 59 billion dollars worth of liabilities. 

Things were a little more cheerful in Japan, where the yen soared to a 14-year high against the dollar despite direct government warnings of intervention against ‘abnormal’ currency moves. Further instability loomed as liquidity thinned out ahead of the US Thanksgiving holiday and the euro traded down as much as 0.2% against the US Dollar, the result of a volatile overnight session. 

By Friday, the US dollar and Japanese Yen looked set to extend their gains as European and US equity index futures traded deeply in negative territory. This pointed to continued risk aversion through the end of an already tremulous trading week as a potential default in Dubai inevitably gave investors a scare. With the UAE central bank scrambling to alleviate fears, next week may well bring some clarity to the saga.

The British Pound Sterling is the world's oldest currency still in use. It is the official currency of the United Kingdom and its overseas territories including the Channel Islands and the Isle of Man and is ranked third in terms of international reserves after the Euro and US Dollar.

The British Pound is also the fourth most widely traded currency in the world after the Euro, US Dollar and Yen.

As the official currency of the British Empire, Sterling dominated international currency markets up until WW1. In the aftermath of WW1, the British government was left heavily indebted and it was this period that marked the ascent of the US Dollar at the expense of the Pound. The Bretton Woods agreement of 1940 pegged the value of Sterling at £1-$4.03, however in the 1970's this exchange rate broke down and Sterling became a free floating currency.

Despite being a member of the European Union, Britain along with Denmark, has negotiated an opt-out clause from adopting the Euro as a national currency. Replacing the Pound is a controversial ideal with the British public due to its symbolic value of British sovereignty. Debate continues over when, if ever the UK will adopt the Euro.

Economics

The British economy is based on the service and manufacturing sector and is the second largest economy in Europe after Germany. London, along with New York and Tokyo is one of the global centres for financial trading and e-commerce produces about 10% of UK GDP.
The Bank of England formed in 1694 is central to Britain's economic policy. The Bank was nationalised in 1997 and currently operates with the mandate of maintaining financial and monetary stability while keeping inflation rates as close as possible to 2%.

Setting interest rates is the primary tool the Bank uses to regulate the economy. Interest rates impact on Sterling internationally as they determine yields on investment as well as rates of growth and inflation. Generally speaking, low interest rates promote growth by making the cost of borrowing cheaper while higher interest rates slow growth down. In the wake of the recent financial crisis, the Bank has cut interest rates aggressively, by 2% in the last 2 months, to stimulate growth in the ailing British economy.

Influences

The UK is a relatively high yielding currency and as a result, Sterling often suffers at the expense of the US Dollar when markets turn to risk aversion. Although the Pound and Euro are not technically linked the two currencies have historically tended to move together.

However, since 2006 this correlation has weakened. Stable British economy and government mean the Pound has been favoured as a relatively high yielding alternative to the Euro.

Future

The OECD predicts the UK economy will be one of the hardest hit of the G7 nations by the credit crunch. Financial turmoil, slumping property values and diminished export markets have significantly devalued the Pound and the UK economy has contracted by 0.5% in quarter 3 of 2008.

Revised GDP figures predict the economy will contract by 0.75 to 1.25% in 2009. In the aftermath of the market shocks in September and October 2008, the British government injected billions of Pounds into financial markets, bought preferential shares in major banking institutions, slashed interest rates and is set to lower taxes and VAT. The Pre-Budget Report detailed government plans to lift the country out of recession and the Pound strengthened internationally as a result.

However one major concern of the rescue package is spiralling government debt, which is set to top £118 billion pounds in 2010. This is compared to £20 billion from the previous financial year. High budget deficits are likely to make the Pound less attractive to investors but Darling has cited the 'exceptional circumstances' necessitating excessive borrowing.

Looking forward, this debt level could keep the value of the Pound low for some time as the government has to increase expenditure while simultaneously reducing its revenue through tax cuts. Economists predict we are likely to see the impact of recent government intervention in spring 2009 when there is likely to be an upturn in growth figures.

Pound Sterling vs. US Dollar - last 12 months

Czech Republic started to feel the impact of the global economic crisis only as recently as the second half of 2008. Consumption, including spending on property, has now slowed down fairly drastically. Falling housing demand has been mirrored by slower growth in the mortgage lending.

During 2008, banks in Czech reported an increase in mortgage sales, but it was widely believed this was at a lower rate than the year before.

Now we have confirmation. The latest data from the Ministry of Regional Development reveals that mortgage lending in 2008 plunged by some 20%.

The number of mortgages granted to individual clients dropped 23% from 83,444 in 2007 to 64,497 in 2008. Companies obtained 1,930 mortgages in 2008, a 19% over 2,383 loans in 2007.

In terms of mortgage volume, lending to individuals was down by 25%. In 2008, banks lent individuals mortgages worth CZK113,927 million, compared to CZK142,288 million in 2007.

Companies, on the other hand borrowed 55% more in 2008 - CZK64,222 million worth of mortgages, compared to CZK41,485 in 2007.

Jan Sadil, CEO of leading mortgage bank Hypotecni banka says, "There were many reasons for the fall in the volume of mortgage loans provided in the year 2008, including a record comparative base in the previous period, the macroeconomic development and the financial crisis. The result is quite good in this situation".

Hypotecni banka granted more than 21,000 mortgages in 2008 worth CZK39.6bn, a slight drop from CZK40.4bn a year earlier.

Overall, banks in Czech Republic granted 403,486 mortgages between 2000 and 2008. The mortgage debt grew on a yearly basis by 24% and at the end of 2008 the market amounted to CZK583,520, which is around 16% of Czech GDP.

Mortgage markets experts think that it would be success if banks can provide in 2009 mortgages worth CZK100,000 million.

This is strictly linked to the worsening situation on labour market. In general, the Czech property market isn't over-supplied but prices are fairly static.

The Czech Statistical Office reported on 2nd February that apartment prices in the country increased by just 0.2% in Q4 2008.

In Prague, on the other hand, the average flat price declined by 1.7% (quarter-on-quarter) in Q4 2008. Here, the fall in the number of mortgages granted in 2008 was also the highest - 27%.

All the figures above indicate a slowing property market, which, taking into account the global crisis and the sharp slow down of the Czech economy, will inevitably continue through 2009.

Many experts believe the Czech economy is already in recession, although this hasn't been confirmed yet by official data. In 2008, GDP grew by 5.4% in Q1, 4.5% in Q2 and 4.2% in Q3 and for the whole year it is estimated growth was around 4%, down from 6.5% in 2007.

The slow down is mainly a result of a decline in exports as the vast majority of these (85%) go to the EU, with Germany itself accounting for one third of Czech's exports. Another key factor driving down economic growth is sharply decreasing domestic demand, which, according to estimates, grew only 1.2% in 2008 compared to 5.2% in 2007.

These trends will be even more pronounced this year, as most of Czech's trade partners are already in or are heading for recession. Consumption in Czech is almost certain to slow even further as unemployment - and the fear of unemployment - increases.
The latest forecast from the Czech Ministry of Finance assumes 1.4% economic growth in 2009, a slow pick up in 2010 (2.1% GDP growth) and recovery in 2011 (3.8%).

The figures above, even though indicating a sharp decline in economic growth in Czech, are still far better than forecasts for many other EU countries. The Czech government also has room for some important fiscal measures, such as cutting taxes. And we are likely to see further falls in interest rates.

Our view is that, while Czech will clearly not escape the big economic chill, it is highly likely to be one of the first CEE economies to emerge from it and will return rapidly to steady economic growth, probably as early as 2010/2011. However, much will depend on the timing of a recovery on the revival of its key export markets, most importantly Germany.