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Sterling Overview April 2009

April was another roller-coaster month for the pound where we saw 3 month highs against both the euro and US dollar following positive economic data from the housing market. Mortgage approvals were up by 4% month-on-month and Nationwide reported a 0.9% rise in the average house price for March, although the Halifax has a contradicting report. Nevertheless the markets welcomed the more positive outlook and sterling made significant gains.

These gains were to be short-lived as the following week saw the release of unemployment and inflation figures, both of which were negative for the UK economy and resulted in losses for sterling. However it was immediately after Chancellor Darling’s Budget that sterling depreciated most because his optimistic forecast is not shared by the rest of the market.

The Bank of England has kept interest rates unchanged at 0.5% although there was little chance this was going to change given the recent introduction of quantitative easing to try and boost the economy.

If we are to believe forecasts from the major UK banks, sterling is set to remain under pressure trading within a broad range, and is unlikely to break strongly in one direction. In general we tend to agree with these forecasts at present and expect the pound to appreciate later this year.

GBPEUR

The ECB (European Central Bank) announced a 0.25% rate cut early last month surprising most economists who had widely forecast a 0.5% reduction. Like many economies the outlook for the eurozone is gloomy, particularly for exports where the over-valued euro is heavily affecting trade, particularly in Germany where exportation of cars and other goods account for a large sector of the economy. As mentioned the euro hit its lowest point for 3 months against sterling and has since remained close to this lower trading range.

GBPUSD (Cable)

The FED remain in a similar position to that of the Bank of England whereby very low interest rates have left them with little monetary policy, and quantitative easing has been adopted to boost the failing US economy. Chrysler is in desperate talks with Fiat in an attempt to save itself from bankruptcy, and it is common knowledge that other US car manufacturers are struggling with cash flow. Despite all this the dollar is benefiting from risk appetite when traders buy dollars as a short-term “safe-haven” thus strengthening the US currency.

GBPCAD (Loonie)

The Bank of Canada reduced interest rates last month by 0.25% and released an accompanying statement, which was very dovish saying unless there is an unexpected move up in inflation, they expect their interest rates to stay at these lowly levels for at least 12 months. They also announced they will be the latest economy to introduce quantitative easing following an announcement outlining a framework of measures.

GBPZAR

South Africa’s central bank cut its benchmark interest rate by 1%, the 4th reduction since December, to help spur an economy that may be in its first recession in 17 years. The rate was lowered to 8.5%, the lowest since October 2006. South Africa’s economy, the biggest on the continent contracted for the first time in a decade in the fourth quarter as recessions in the US, Europe and Japan slashed mining and manufacturing exports.

GBPAUD

Despite officials within the Reserve Bank of Australia and Prime Minister Rudd confirming Australia was in a recession, this did little to subdue the appetite from overseas players to buy AUD and the dollar appreciated significantly against the pound last month. The Reserve Bank cut interest rates to 3% early April and although the minutes from the meeting gave little hints to further interest rate direction at the time, weak economic data has since lead the market to speculate about a further rate reduction.

GBPNZD (New Zealand dollar)

New Zealand’s Reserve Bank slashed interest rates by 0.5% to a record low 2.5% on Thursday. Announcing the decision, Reserve Bank Governor Allan Bollard said he expected the rate to stay at 2.5% until the end of next year, but “it could still move modestly lower.” Bollard said it is likely to be some time before economic activity returns to robust and healthy levels.