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Market Update - GBP PLN 30th July 2009
Stock markets continued to rally last week, aiding the pound and euro in equal measure, but giving a real tailwind to the high yielders like AUD/NZD and the Rand. The US dollar typically declines when stocks rally, but that correlation has not been as marked in the last two weeks.
An improvement in UK mortgage approvals for June, and signs of stability in house prices have helped bolster sentiment toward the pound. The recent pause in quantitative easing measures by the Bank of England also points toward possible improvement in the economy. Investors are taking comfort from these data, seemingly choosing to overlook the fact that according to Today's Economic Data last week, second quarter GDP shrank by 0.8%, far higher thanthe 0.3% expected, but still a large improvement from the 2.4% decline seen inthe first quarter.
Sterling has been benefitting from the stock rally and a general improvement in investor sentiment, but the Zloty has been outperforming as investors search for currencies that offer more interest, and the Zloty at 3.75% is one of the better bets. That is limiting sterling's ability to keep pace while risk appetite returns to the financial markets. What we are seeing is an unwinding of the extreme fear levels seen in late 2008/early 2009.
During that time investors aggressively sold emerging currencies and bought the US dollar, reducing risk and also reducing their return (the dollar only offers 0.25% interest rate). Now investors are dipping back into the "riskier" currencies, starting with sterling, but now moving on to more exotic and high yielding pastures. For that reason we see the direction of Sterling/Zloty being highly dependant on the stock markets. A continuation of the stock rally (as looks likely) would probably see the Zloty strengthen further.
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