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Pure FX - Foreign Exchange Market Overview - November 2007

We are delighted to provide you with our latest currency newsletter, which offers a useful insight into the main foreign exchange headlines over the last few weeks.

Sterling Overview

During the last few weeks Northern Rock and the “credit crunch” have been dominating headlines. As a consequence of this sterling has been under considerable pressure as the market watches to see if the wider UK economy starts to feel the strain. Early indications would suggest not, in the sense that generally speaking the economy is stable albeit slowing down slightly; inflation is broadly inline with expectations, as were retail sales but the main surprise was a decrease in wage inflation. This could be down to the fact companies are more willing to hold onto staff and employees are more willing to accept lower pay increases in return for job security. Nationwide Building Society released its latest house price report indicating house prices fell last month by 0.8%, the sharpest fall since February 1995. In contrast the latest CBI trade survey shows that retail and business sentiment are still strong.

What does all this mean for sterling? For the moment we will continue to see sterling under pressure as the market waits to see if there are any more signs of a slow-down.  Also, it is generally accepted that the Bank of England will have to cut interest rates at some point. The timing of this cut could have a major impact on exchange rates. A cut in December would probably mean sterling weakens, but if they wait until next year then we may not see sterling lose much value.

There are options available that can eliminate currency risk such as buying currency on a forward contract.  This allows clients to secure exchange rates today and remove any chance of the purchase becoming more expensive.  Please contact us to discuss further.

GBPEUR / GBPCYP / GBPMTL (The Cyprus pound and Maltese lire are influenced by the euro)

The main benefactor to the recent credit crunch has been the euro, which is trading at four year highs against sterling and also all time highs against the US dollar. Inflation in the eurozone remains stubbornly high and as such the European Central Bank is likely to have to raise interest rates in 2008, which would tend to make the euro more expensive.

GBPUSD (Cable)

Clearly attention in the US financial markets has been focused on the fallout of the sub-prime mortgage sector. Recent data shows that the real economy has not been hit by the credit crisis so far with quarter 3 GDP at 3.9%, the fastest growth for 18 months. Having said that the Federal Reserve is still likely to cut interest rates again, therefore it is unlikely the dollar will recover in the short term.

GBPCAD (Loonie)

The gains against sterling made by the Canadian dollar last month have been cut back this month. Despite high oil and commodity prices, economic data in Canada has suggested that the rise in interest rates already priced into the market may not happen. As such the loonie has lost value recently.

GBPZAR (South African rand)

Like the Canadian dollar, the rand has benefited from high commodity prices, although most recently these gains have been wiped out following some questions over the continued raising of interest rates in South Africa.