Politics Drive the Currency Markets

Market Snapshot

The table below shows the percentage movement of exchange rates yesterday, along with the extra currency you could have bought if buying with £200,000.

This report will take a look at the cost of buying foreign currency and factors that could affect your currency transfer as detailed below:

Draghi’s Speech, Merkel trip to Athens

Weak UK manufacturing & Trade Deficit

US Dollar / AUD  Focus

Draghi Speech & Merkel Trip to Athens

The Euro took losses yesterday following Mario Draghi’s press release warning that the ECB cannot be relied upon to fix the crisis and that individual governments need to make the reforms, with a nod to Greece in particular. It is no surprise his comments, along with the reduced growth forecasts from the International Monetary Fund (IMF), and Greek finance concerns took the shine off the Euro dropping 0.5%. The reality however is that the bond purchases should still go ahead once these countries have made their cuts, so this really is just a game of buying time and hence the reason why we are in a for a protracted period of heightened volatility for Euro exchange rates.

Angela Merkel was in Athens yesterday (the first time since 2007) having been invited by Greek Prime Minister Antonis Samaras, and where she faced a hostile welcome from the Greek public, to the extent that 7000 police officers were used to control protesters! To refresh, Greece is still negotiating the next €31.5 billion tranche needed by the end of November, before the money runs out. Investors are still concerned whether Greece can do enough to be granted the next tranche which is why the uncertainty and volatility remains.

Greek Industrial Production figures are released this morning at 10:00 although the leftovers from yesterday’s events should carry more weight.

Weak Manufacturing & Trade Deficit

UK factory output fell more than expected yesterday providing yet another signal that the British economy is badly flagging. Forecast for August was for a slide of -0.6% although it came in at -1.1%. The figures tie in with last week’s UK Purchasing Managers Index (PMI) data for the construction and manufacturing sectors. Did the economy really recover as much as hoped in the 3^rd quarter?

The UK trade Deficit also came in considerably worse than expected, widening to £9.8 billion with exports down and highlighting just how fragile the manufacturing sector really is. With such a bad run of data and the fact that the IMF sees negative growth for the UK whilst also revealing that Britain will have a bigger budget deficit than Greece, then the UK does look set for a bad patch with GBP EUR on track to slide to the 1.21 / 1.22 levels. There is already political pressure building on David Cameron to change tact although he has stated that there will be no “Plan B” which will be an important theme in the coming weeks.

US Dollar

The pound continued its fall against the US dollar breaking below 1.60 for the first time in a month. Trouble in Greece and all the days other developments seem to be driving a flight to safety back to the US dollar. US mortgage applications and the Fed’s Beige Book, which reports on economic conditions, are released which should provide a better idea of where the US economy is heading. Having now broken 1.60 for GBP USD, a test to 1.57/1.58 should now be on the horizon.

AUD Focus

Westpac consumer confidence figures late last night were weaker than expected highlighting the sign of the times. There are mixed signals for the Australian dollar now. With a cooling off in the mining sector and worries over the jobs market this is negative for the dollar. On the other hand China has stated it will look to take more pre-emptive, targeted and effective measures on its own monetary policy which may help support the Aussie going forward.      To discuss how these issues may affect your requirement call us on 0800 328 5884 or 01494 725 353 or e-mail me directly jll@currencies.co.uk