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Pound Shrugs off Bad Data

The pound shrugged off the weak retail sales figure yesterday and has continued to gain against the Dollar. Cable has opened up 1% so far today and looks like it might hit up to 1.600 GBP/USD on a technical basis over the next few weeks. This move is more down to the weakness of the dollar rather than pound strength. Fundamental data has been weakening recently in the UK and this has allowed most of the other most actively traded currencies to gain ground against the pound.

The Japanese Yen has continued to lose value against the big three (Dollar, Euro, Pound) as talk of further central bank intervention provoked traders to transfer out of the currency. Our clients are using this opportunity to stock up on Yen in the near term, we have witnessed this type of currency manipulation before and it hasn’t ever had a prolonged effect.

Swiss franc buyers have benefitted from the jump in the GBP/CHF rate of exchange due to lower inflation forecasts out to 2012 which could resonate around the market for sometime and should keep the Franc under pressure. The reality is the market is still long Francs and the news out of the SNB was much more dovish than anyone could have expected.

The SNB stepped back from an aggressive campaign of intervening to hold down the super-strong franc in June, saying that it would reenter the market only if it saw fresh signs of deflation- a trend that is exacerbated as a strong currency makes imports cheaper.

Inflation data is the driving force behind most long term Forex moves due to its impact upon central bank policy.

The Australian dollar is still charging forward in value, reaching a 2 year high against the greenback and still gaining against the Euro, Pound and Yen. Mainly driven by it’s high yield advantage against the much lower yielding reserve currencies. This trend will be likely to continue as long as risk appetite and the global recovery remain intact.

Our clients have been really stocking up on Australian dollars over the past year and they are enjoying the 5% interest rates and capital appreciation. A £100k investment in the Australian Dollar this time last year is now worth £120,000 if it was sold back into the market today with the added bonus of earning 5% interest throughout.

On a larger scale the banks are participating in ‘carry trades’ which allows them to borrow from central banks at 0.5% here or 0.25% in Japan, they then shift those funds into Australian dollars and earn a hefty yield premium on their borrowed money. The carry trade is very popular for obvious reasons and as long as inflation remains low here and high there the rate of exchange is likely to continue dropping.