DSR’s Risk Analysis Currency Markets Review
Posted by Rebecca Sale on 8 th in DSR, Investment Property on 8th of November 2010The currency markets started the New Year as 2009 had finished, with investors selling over purchased Euros in favour of other currencies, and predominantly buying back into the safety of the US Dollar.
EURO MARKET
The Eurozone has felt the effects of debt problems in Greece, Portugal, Spain and Ireland with worries over possible downgrades to their sovereign-debt rating and the economic problems relating to unemployment concerns. The U.S. reported that unemployment was unchanged in December at 10 percent, while the EU said the euro-region’s rate had increased to 10 percent. The Euro has declined in value by over 8% since November reaching $1.36 against the USD and 1.16 against GBP as investors continue to pull cash out of Europe, jeopardizing the Euro’s status as a future substitute to the Dollar’s reserve status. European stocks have also been out of favour, draining some $13 billion from the market, while money has flowed into U.S. stocks and elsewhere.
Expectations for the first half of this year are for the Euro to decline further with sovereign-debt risk continuing to be a recurring theme and with the region’s economy expected to only expand 1.2% this year, compared with 2.7% in the US.
DOLLAR MARKET
This could again be the year that the Dollar is the overall favourite currency to buy and hold for safety, due to risk aversion, and especially with the chance that the US will be first out of the UK and Europe to increase interest rates, as their economies are likely to lag behind.
The Dollar has gained investor support against the weaker Euro from above the $1.51 level of last November, reaching $1.36 in February after the US 4thQ GDP figures showed in January that economic activity had expanded for the second consecutive quarter, with an annualised growth of 5.7%. Sales of new and existing homes in the US fell for the second month in a row in December, the month after a government tax credit was originally due to expire, raising doubts about recovery in the housing market, although building permits unexpectedly increased. Wholesale prices in the U.S. rose at a slower pace, showing the economy is recovering without the immediate threat of inflation, while the trade deficit widened more than anticipated, pointing to a rebound in global demand that is fueling growth. US unemployment dipped to 9.7% last week, but still lost 20,000 jobs.
President Barack Obama also announced a USD 3.8tn (GBP2.4tn) budget plan for 2011, which includes increased spending for job creation but cuts in other areas and the forecast is that the US deficit would rise to a record USD 1.56tn this year. The market response was initially subdued with the Dollar easing but later moving ahead again with investor demand.
STERLING MARKET
Sterling is presently caught in the middle of the Euro versus Dollar pair’s movement and fell to lows of $1.55 against the Dollar from highs of $1.6450 this year and previous highs of $1.6850 last November. However, the Pound has benefited from the weakened Euro reaching a high of 1.16 from 1.11 lows earlier and is currently trading just below 1.14. Sterling however, is not generally in favour with investors as the UK has similar problems to the Eurozone and elsewhere trying to recover from recession, but with the added uncertainty of the outcome from a General Election, which of course undermines confidence in the Pound. The Bank of England as expected left interest rates unchanged at 0.5% last week and will for some months to come and has paused its £200bn Q.E. stimulus plan, leaving the option open to extend again if necessary.
OTHER MARKETS
The Canadian Dollar against the Pound has ranged betweeen CAD 1.64 and CAD 1.74 over the last month and short-term prospects for the currency are difficult to gauge. Commodity price weakness remains the most likely short term risk for the currency’s value, and will likely provide a counterbalance against any improvement in the manufacturing sector in the months ahead. Canada has an unemployment rate of 8.5%, less than that of the US and although there are a number of positive economic indicators such as recent GDP growth, unemployment is still a concern.
The Australian Dollar’s continued investor support reaching AUD 1.73 against the Pound, eased above AUD 1.82 last week due to the RBA’s decision to keep interest rates unchanged at 3.75% after analyst expectations of a further increase. The Central bank felt that the impact of the previous 0.75% increase throughout Q4 has yet to be fully digested. The unemployment rate in Australia also fell slightly, fueling speculation of continued rate increases later this year.
The Swiss franc joined the US dollar and the Japanese yen as being one of the strongest major currencies, but the moves had more to do with lingering risk aversion than economic data, although Switzerland’s retail sector turnover increased by a real 0.6% from the previous year. Exports also rose year-on-year for the first time in 14 months, a further indication that economic improvement remained on course.
The UAE Dirham which is pegged to the US Dollar also moved from AED 6.05 against the Pound to reach AED 5.72 and the Hungarian Forint also fluctuated last month, following the Euro’s fall reaching HUF 315 against the Pound from HUF 295 levels in December.
In conclusion, there are still fears that global growth could slow and give way to a contraction – double dip recession – with early removal of Government stimulus measures, and if un-employment levels prevail across the globe, this will cause consumers to be hesitant about their spending and future.
The US Dollar is still regarded as the main safe-haven currency to hold. Investor’s risk aversion and expectations that the US will be able to achieve a sustainable recovery ahead of other regions is expected to result in further buying of the Dollar over the coming months, with occasional reversal of this trend due to profit taking opportunities.
