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Global daily currency analysis - Independent daily analysis of all the major currencies.
Market commentary and insight
Market commentary and insight looks at key underlying themes in the markets and the important trends that are likely to develop.
Sterling difficulties increase : 20-12-07
The UK data did not receive much market attention on Thursday, but could still prove to be very significant for Sterling
The current account deficit increased to a record GBP20.0bn for the third quarter from GBP13.7bn the previous quarter. The deficit has been steadily deteriorating over the past few years and the third-quarter deficit was equivalent to 5.7% of GDP. This is an important milestone for the UK as the deficit is now a larger proportion of GDP than the US current account deficit
Secondly, there was a record government borrowing requirement for November of GBP11.2bn. For the first 8 months of the fiscal year, the borrowing requirement increased to GBP36.2bn from GBP26.0bn last year
The UK economy is, therefore, at risk of a toxic combination comprising weaker growth, deteriorating budget position and a record current account deficit. In this environment, overseas funds will be much more cautious over the UK with the risk of a sudden exodus of capital and a structural bear market for the currency. Sterling rallies should, therefore, quickly attract renewed selling pressure.
Paulson's dollar concerns? : 30-10-07
In comments on Tuesday US Treasury Secretary Paulson stated that ‘The United States is strongly committed to a strong U.S. dollar’.
This a subtle shift in language from Paulson’s recent remarks with the double use of the word strong. As far as the US Treasury is concerned, a weak dollar is beneficial as it will provide one important prop of support for the economy.
Paulson’s remarks may, therefore, be a significant first sign that the US Treasury will take the dollar’s decline more seriously and official comments will need to be watched very closely in the short term.
Central banks may curb dollar losses : 23-10-07
The central banks will not want to get dragged into a battle against the markets unless the dollar weakens substantially further and enters much more dangerous areas. It is still the case that open central bank intervention would probably not be triggered unless the dollar weakened beyond 1.50 against the Euro. There is, however, a greater scope for the governments and banks to take a significant behind the scenes role in the currency markets.
At a political level, there is likely to be some pressure on sovereign investment funds to curb any dollar selling, at least in the short term, while the US administration may also seek to prevent peg breaks by key Middle East governments.
The central banks are also just as aware as the markets of important technical levels and will use this information to their advantage. For example, it is certainly within their scope to execute a large order to help push the Euro through support levels and trigger steeper dollar corrections stronger. This would keep market expectations within bounds and would help prevent markets seeing the dollar a one-way bet.
UK housing fears to increase : 11-10-07
The latest RICS house price survey reported a figure of -14.6 for September from -3.3 the previous month, the weakest reading for two years.
Caution is required as the survey reports the net balance of agents reporting that house prices have fallen. The survey does not indicate by how much prices have fallen and the survey can be negative when prices are broadly steady.
Nevertheless, the survey will reinforce concerns over the UK housing sector and will maintain pressure for the Bank of England to consider an early cut in interest rates.
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