Brief Rally in Sterling

Currencies Direct Reviews the Brief Rally in Sterling

29, September 2009

Sterling this morning has enjoyed a brief rally, on the back of better than expected economic numbers. Key levels to watch $ 1.60 & € 1.10. if we can break and hold above these levels then Sterling could continue to rally.

Currency markets are trying to come to terms with just what the Yen policy of the new Japanese Government is and what the repercussions are for other global currencies. The series of conflicting messages coming from the new Finance Minister, Mr Fujii, is keeping attention on the Government’s likely tolerance for a stronger currency but on balance, it appears that intervention is unlikely.

The Finance Ministry would clearly prefer not to get involved but feel that in the current economic phase, a state of ‘laissez-faire’ might not be viewed too favourably at home. Hence we get more vocal than actual support for the Dollar. The Finance Minister, Gyohten, commented that Japan should fully support the USD as the global reserve currency. Outlook for the Yen is for further strength over the next few weeks, targeting the 85.00 level but that the Dollar will begin to have recovered prior to year end with estimates of the cross being in the low 90s by then.

On a quiet day for data yesterday, the press and hence the forex market got itself into a bit of a tiz about the possible outcome of a couple of Bank of England meetings this week. Firstly, they interpreted The Governor, Mervyn King’s meeting in Sweden with the Riksbank as a sure sign that the BoE was about to implement a negative interest rate structure on commercial banks’ deposits at the Central Bank.

Secondly, rumours abounded over the agenda and outcome of the meeting called by the BoE today with economists and market participants purportedly related to the current QE stimulus measures. Whatever the outcome of the respective get-togethers, traders will remain nervous of being long of Sterling in the near term.

The pound might be underpinned should Euro/Dollar test the strong Euro support point of 1.4550 at which point we find out whether it is stop losses or real money investors who hold sway at that level.

Also overnight we had statements related to monetary policy from both the Canadian and Australian Central Bankers. The Bank of Canada’s Mark Carney, when questioned about intervention, reiterated that he will do whatever is necessary to ensure inflation targets are met and also that he did not foresee Can$ interest rates moving until well into the summer of 2010.

The Reserve Bank of Australia’s chief economist talked about the housing boom and the inevitability that interest rates could not remain at current low levels for any length of time. Perception is still that there will be no change in Aussie rates at the October meeting but that we could see a 25bp hike at both the next 2 meetings. Aussie and Kiwi currencies both firmed up.

Elsewhere, the South Korean central bank voted unanimously to hold rates at current levels whilst later this morning, the Romanian Central Bank is expected to cut the official ROM lending rates by 50bp to 8% and this afternoon the Israeli Central Bank meet. Remember, Israel were the first of any of the monetary authorities to increase rates (at their last meeting) so expect no change this time.

Report by Phil McHugh.

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