UK IN RECESSION, WHAT ARE EFFECTS ON THE POUND
Sterling exchange rates fell yesterday morning following the release of Q1 UK GDP highlighting the UK economy has now posted negative growth for two consecutive quarters officially bringing the UK into recession. This is the first time this has happened since 2009 and was a little surprising with initial forecasts suggesting the UK would just scrape through into positive territory at 0.1%. Following the release the market reacted immediately with sterling losing 0.5% against most major currencies. But what now for the pound?
BEST EXCHANGE RATES FOR GBP/EUR
Following the positive showing from the pound on Tuesday (with levels reaching a 20 month high at 1.2277) the market quickly fell below the 1.22 mark. Many clients that have waited for the market to continue to rise had a nasty surprise yesterday morning following the UK GDP data release. The difference in the space of less than 24 hours on a £200k transfer to Euros was €2,280 when compared to the high and low, indicating just how important it is to be in a position to strike should a spike occur, as more often than not they are short lived.
To be honest I am personally a little surprised that the UK has experienced this double dip recession as recent data sets had been slightly more upbeat as of late and I genuinely believed a positive figure would have been shown. Yes there is an argument that the political uncertainty in Europe with the on-going French elections could hamper the Euro, however I do fear this could now be the start of a mini short term slide and we could easily see levels back towards 1.20 as investors digest the fact the UK is back in recession. Should you be looking to buy Euros in the short term and are worried the market might slip away then contact your account manager to discuss your options. We have many clients utilizing forward contract, securing their exchange for a guaranteed delivery in the future. This contract enables you to lock in a price for up to two years in advance for a nominal deposit and thus avoiding the market uncertainty. Contact us today as I still believe the current Euro exchange rates are representing a good buy opportunity.
BEST PRICES ON THE US DOLLAR
As with GBP/EUR, UK GDP data has slightly hampered the pounds recent surge against the greenback. Cable levels earlier this week hit a near 7 month high at 1.6170 but dipped below 1.61 following the GDP release. This week continues to be a busy week for the dollar with the Federal Reserve releasing its latest interest rate decision yesterday evening. Rates remained on hold at 0.25% as expected. In the resulting press conference the FED gave a reasonably upbeat forecast showing a slightly faster growth rate for the economy in 2012 (a little more than 2.2%) slightly higher inflation (close to 2%) and a slightly lower unemployment rate (8% or just below). It also indicated that the Fed intends to hold interest rates exceptionally low – near zero – until late 2014, something that I feel will keep the GBP/USD rate range bound between 1.60-63 in the coming weeks.
Other data of note for dollar buyers/sellers will be US GDP data on Friday at 13:30. As with the UK data yesterday, this could have a major impact on short term moves for the dollar, expectations are for a fall month on month from 3% to 2.6% and any deviation from this is likely to cause volatility and could well be one to avoid.
TRANSFERRING MONEY TO NEW ZEALAND
Sterling has posted some of strongest gains of late against the kiwi gaining over 10 cents or 6% since February, a difference of over NZD$24k on a £200k transfer during this period. Being a benefactor of riskier trades due to its higher interest rates, the kiwi could well benefit should economic confidence return to the market. If the US posts better than expected GDP data on Friday this could well lead to a surge into riskier currencies such as the NZD, ZAR and AUD through the use of a carry trade.
This is where clients borrow in a low yielding currency such as the JPY or CHF and will purchase currencies offering much greater yields to benefit from the increased returns. This is a risky strategy and will often take place during more certain economic periods and with the US acting as a global barometer better growth figures may lead to an increase in demand for these trades and hence a boost in demand for the kiwi, of course the reverse could happen should the data be poor!!
Breaking News – Overnight the Reserve Bank of New Zealand held its base rates at 2.5%.
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