Charles's Thoughts: The week got off to a quiet start with the markets waiting for the minutes of the last Bank of England meeting which were released on Wednesday. The minutes contained no surprises. The committee members agreed as one to keep the level of quantitative easing at current levels [£175bn] and there was no mention of reducing the interest rates at which the BoE paid on deposits held with it by the banks. Then Mervyn King the Governor of the Bank of England made it clear that he welcomed a weak sterling and this caused sterling to weaken. His logic was that a weak sterling would boost exports. One of the problems with this logic is that it assumes we have things we can export which given the state of UK industry makes me wonder. It also assumes that other countries want to o r have the capability to buy our products which given the credit crunch is worldwide may be a wrong assumption. One theory that I have seen for the Governors determination to undermine sterling is that it is one of the few controls he has at his disposal to hit the BoE’s inflation target of 2% by increasing the cost of imports. This could well be the case but the problem is that once a currency starts to weaken it is very difficult for a central bank to stop the rot. The US$ has gained against sterling which isn’t a surprise given sterling is the weakest currency over the last year losing 15% on a trade waited basis. But it has been suffering against the euro, although it did pull back from one year lows, and other currencies given its dual deficits of budget and balance of payments. The Federal Reserve met this week and overall its announcement was positive on the economy with signs of improvement but cautious on the speed of the recovery given the surplus capacity that existed. Therefore US interest rates will be kept at current levels for quite a while. The US has committed to better fiscal management given that for the US$ to maintain the status of the world’s reserve currency then it will have to convince the world that it has some value.
The euro continues to be flavour of the week/month/year. Business confidence in Germany continued its upward trend albeit slightly below those predicted by the analysts. As Germany is a key driver of the euro zone economy this is positive for the euro zone. This weekend we have the German elections and it is expected to be a close run. Some market commentators are predicting the euro to approach parity with sterling by the year end [i.e. €1=£1] whereas some believe sterling to be undervalued against the euro. However sentiment at this moment in time is with the euro and as such the upside for sterling is limited whereas the possibility of parity higher.
There seems to be no limit to how far the high-yield/commodity backed currencies will go as they continue their strong run. We are seeing multi-year highs from the South-African Rand, Australian and New Zealand. However the Canadian dollar fell back slightly. Commodities have enjoyed an incredible run and I do wonder if we are will begin to see a fall back in commodity prices and a knock affect on these currencies.
Why is Currency Management So Important? Using a bank could cost you £3-4,000 per £100,000 transferred. Buying at the “wrong” time could cost you many £’000’s more as rates can move as much as 3% in a very short period of time. Then add in transfer costs that the banks charge for sending and receiving funds and you could be looking at additional costs of £10,000 per £100,000 transferred. By developing a currency strategy and by working with a specialist currency broker these losses could be minimised if not eliminated.
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