Pure FX Monthly Report

The pound endured a bruising start to 2013, as investors bet on a triple-dip recession for the UK.

Like a phoenix from the ashes, the euro came back to life to make major gains across the board.

The US dollar lost out, as America’s slow but steady economic recovery continued to gain pace.

The Australian dollar’s luck continued to run out, as Australia looks rudderless without its mining boom.

UK Sterling

Have you ever seen a currency beaten so black and blue?

Sterling endured a bruising start to 2013 in January, losing more than 6 pence against the euro, and 5 against the US dollar. This takes the pound to a 14-month low against the common currency and its lowest point against the greenback since last August. Of course, while the pound might be bruised, this is like manna from heaven if you’re starting with euros or US dollars and plan to buy the pound. This is because it’s lifting your exchange rate, as though it were on stilts.

So, what’s to account for this veritable pound thumping? Well, it’s really two things. First, there’s the fact that the Eurozone is back. Back from the abyss that is, as the markets decide that, having survived 2012, the common currency is tougher than they thought. Second, the UK economy is still a car with a stalled engine. The UK contracted –0.3 per cent in the least three months of 2012, putting us on course for a triple-dip recession.

Whither next for the pound? Well, like I say, that depends on whether the UK enters recession. A triple dip would quickly see the pound fall further. Furthermore, though the Bank of England is holding fire on its stimulus now, the likelier a recession looks, the higher the odds it’ll start its printing press again. That’d bring the pound down too.

Euro

A phoenix from the ashes!

The euro enjoyed stunning gains across the entire board in January, as investor confidence in the Eurozone revives. Why the turnaround? Well, it’s really little more than a case of ‘New Year, new beginning’ as investors decide that, having come out of 2012 alright, the euro will surely manage whatever else is coming at it. For the moment meanwhile, the European Central Bank is holding interest rates at 0.75 per cent.

US dollar

USA! USA!

Good news out of the US economy drove the greenback 4 cents lower against the euro in January, even as the dollar climbed against sterling. Firstly, the US Department of Labor revealed that the United States created 335,000 more jobs than previously thought last year, pointing to an economy rapidly on the mend. In addition, the Fed kept up its stimulus, injecting $85bn into the economy. As a safe haven, all that good news meant the US dollar lost out.

Australian Dollar

The end of the Aussie economic miracle?

Sterling lost 3.0 per cent against the Australian dollar in January, chiefly thanks to the UK’s economic woes. This is in spite of the fact that almost all the indicators coming out from Down Under last month pointed downward. For instance, home loans fell –0.5 per cent in Australia in November while retail sales fell –0.1 per cent. This tells us that, with the mining boom set to peak in weeks, there’s not much else keeping the Aussie economy afloat. Looking ahead, that could see the Australian dollar start to resemble a lemming, and dive.

New Zealand Dollar

Perhaps a kiwi can fly?

The New Zealand dollar claimed a whopping 5.4 per cent from sterling in January as well as hitting a 14-month high against the greenback as New Zealand’s economy looks set to accelerate. Speaking recently, Nick Tuffley, chief economist at one of New Zealand’s biggest banks ASB, said that, “From quarter to quarter, we are going to see a lot more acceleration coming through.” If so, that puts New Zealand in a markedly faster lane than most industrialised nations, accounting for the flying kiwi.

Canadian Dollar

Oh, Canada!

The loonie enjoyed one of the measliest gains against the pound in January, at just 1.61 per cent, as America’s northern neighbour got off to the new year on the wrong foot. For one, Bank of Canada governor Mark Carney (soon to take the top job at the BoE) stopped hinting he’d raise interest rates above 1.0 per cent, as Canada’s economy no longer warrants the rise. Furthermore, a Reuters poll of economists predicts job creation in Canada is set to slow dramatically. All of which adds up to a lame-duck loonie!

Brazilian Real

Up the real, but down Brazil?

Brazil’s currency claimed +2.8 per cent from the greenback in January, in spite of the fact that economic growth in Brazil slowed to just 1.0 per cent. So why the climbing real? Well, it’s one part global optimism, as a bright outlook for the US leads investors to take risks elsewhere. It’s also one part capital flows, as Fed chairman Ben Bernanke floods the market with $85bn a month, meaning investors takes that cash elsewhere, to places like Brazil.

Turkish Lira

Turkey in the fast lane!

The lira enjoyed a gain of half a cent against the US dollar in January, as Turkey got off to 2013 in a bullish mood. For instance, finance minister Mehmet Simsek predicts that, following growth of just 3.0 per cent in 2012, that will increase to 4.0 per cent this year, making Turkey one of the world’s fastest-growing countries. Add to that the fact that, at 6.2 per cent, inflation is at a 35-year low, and there’s good reason to think the lira will keep climbing.

Chinese Yuan

The talk in 2013 is of the yuan’s growing global status.

When will the currency be fully floated? When will it challenge the US dollar as the world’s reserve currency? Already, there are signs that the ruling Chinese Communist Party is paving the way for this new role. In 2012, it greatly increased the amount of foreign trade allowed to be conducted in yuan. However, before it becomes a global currency, the CCP must make the yuan fully convertible. It won’t be popular until China eases its grip on the currency’s inflows and outflows.

To find out how all this will impact your foreign exchange transactions, feel free to visit foreign exchange specialists Pure FX, email enquiries@purefx.co.uk or call +44 (0) 1494 671800. They’d be delighted to give you an in-depth response to your query.

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