Tuesday, March 8, 2011

The Latest Market Commentary as on 8th March 2011

Good morning, I hope you are well.

I am pleased to provide you with our latest market commentary.

It hasn’t been the strongest month for sterling. Compared to the January GBPEUR exchange rate of 1.19-1.20 this month it’s been closer to 1.17-1.18. There are numerous reasons for this:

For one UK GDP figures for the fourth quarter of 2010 were not positive. The first estimate in January showed that GDP declined -0.5% in the final 3 months of 2010, but this estimate was later revised in February to -0.6%.

Furthermore it emerged that inflation rose to 4.0% in February compared to 3.6% the month before. This indicates that prices for goods and services continued to climb. This risks damaging the credibility of the Bank of England, because the Government’s target for inflation is 2.0%.

However there was some encouraging news for sterling in the future. The results of the Monetary Policy Committee vote on interest rates changed for the first time in months. Most recent minutes show 3 (out of 9) MPC members voting to increase interest rates. This indicates the Bank of England is not far away from increasing rates, which in turn should benefit sterling.

Of course for a more in-depth assessment of your particular currency feel free to speak to your currency dealer at Pure FX.

Despite the ongoing concerns about the euro’s long-term viability (see Portugal, Ireland and Greece!) the single currency has strengthened.

In particular the German manufacturing PMI (measuring output in the German manufacturing sector) hit record highs during February. This is important because Germany is the planet’s second biggest exporter next to China, meaning that strong manufacturing bodes well for Germany as a whole. In addition Germany’s trade surplus rose €2.1bn to €14bn.

Furthermore the euro has benefited as an alternate haven to the US dollar as tensions in Libya continue. In the past the US dollar has benefited as a safe haven during times of political strife, but during February this changed. Perhaps because of the ballooning US deficit, which might be causing the markets to look elsewhere?

However euro bulls need to remain cautious. The EFSF rescue fund for ailing nations has still not been finalised in spite of a conference in Brussels to settle the matter two weeks ago. In addition the Portuguese economy is teetering as bond yields approach dangerous levels above 7%.

US Dollar
It’s been a mixed month for the US dollar in terms of economic data. US consumer confidence increased during February. In addition non-farm payroll figures increased 192k last month – the largest rise since May 2010.

However Fed Chairman Ben Bernanke told the Senate that economic conditions are still too mixed to pare back the $600bn quantitative easing package.

As we have seen in the in the past when there is positive US data, the dollar tends to weaken as risk aversion abates. February was no different with both sterling and euro reaching 2011 highs versus the dollar.

Australian Dollar
It was a tough month for the dollar owing to a series of natural disasters in Australia. First off calamitous floods meant the markets sought investments elsewhere, then a hurricane in Queensland compounded the issue. However the Australian economy is in robust shape, therefore we anticipate the AU dollar to remain strong.

New Zealand Dollar
The New Zealand dollar collapsed in February on reports of a major earthquake in Christchurch, the nation’s second largest city. In addition to the humanitarian crisis some economists are suggesting New Zealand might dip into recession as a result.

Canadian Dollar
It’s been a quiet month for the Canadian dollar. GDP for Canada for the last quarter of 2010 met expectations, and this helped the CA dollar against the US dollar. In addition the CA dollar has risen as confidence in the US dollar has declined. With ever rising oil prices we expect the Canadian dollar to remain strong for some time to come.

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