Foreign Exchange - UK Weekly Update - Written by rick on Monday, December 22, 2008 16:16 - 0 Comments
Interest Rates Bottom Out - World First’s Sterling Update - 22nd December 2008
Sisyphus, a mythological Greek figure, was cursed with the perpetual task of rolling a huge boulder up a steep hill, yet each time the rock reached the top it would roll back down again. Parallels can be drawn between this endless task, and the role of the central banks in constantly tightening and loosening monetary policy.
Central Banks manipulate interest rates as a means of controlling growth and inflation through the peaks and troughs of business cycles, and it is the major arrow in Central Bank’s quiver. Last week’s historic interest rate decision by the Fed to lower rates to a band of 0 - 0.25% sees the rate cycle reach the bottom of the proverbial hill, and highlights how dire growth prospects are in the US.
The accompanying statement revealed that quantitative easing would be also be used to control monetary policy (manipulating the supply of money), as well as an admission by the Central Bank that “the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time”. It looks like Sisyphus might get a rest at the bottom this time.
This decision saw the dollar lose some of its recent shine, and it was sold off against major trading partners as the news was digested negatively. Confidence also seems to be slowly ebbing back into the markets, and as risk appetite returns, we expect the dollar to further weaken. The Dollar was at 13 year lows against the Yen and lost over 4% against the Euro.
It was undoubtedly the Euro’s week in the sun, helped by hawkish comments from the ECB, suggesting a hold at the next interest rate decision. A particularly poor German IFO sentiment reading late in the week retracted some of the early gains, but the euro still managed impressive progress against its major pairings. It continued to bully sterling, etching out another 4% over the week, and reaching yet another record low of 1.0460 at one stage.
The Pound was further undermined by the BoE minutes, revealing that at the last policy decision meeting, the committee discussed an even larger cut than the 1% delivered. Charlie Bean, Deputy Governor of the Bank of England also commented that zero interest rates were possible in the future, and thus the pound received the same treatment as the dollar throughout the week. Also damaging the pound was a less than promising jobless figure arrived late week, and worrying Public sector net borrowing figures of £16bn for the month of November.
Tomorrow yields important data from the US and UK, as finalised GDP figures are due out. These will be the only major data this week owing to Christmas. However, the lack of liquidity in market over this period may yet provide some further volatility.
Trade of the Week
This week’s trade of the week was for a client selling sterling and buying Euros. They were guaranteed a worst case rate (WCR) of 1.02 and can participate in 50% of the favourable movement upward from the WCR. The client hedged all of their exposure over a three month period, with no premium payable for this strategy. For full details of this structure please contact one of our options traders on 0207 801 9050
This is the last weekly update for the year, so I wish you all a merry Christmas and a happy New Year.
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Please feel free to contact me (rick.roache@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:
Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.
Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.
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