Bank of England governor Mervyn King's public statement that the UK is in a recession the like of wh...
Bank of England governor Mervyn King's public statement that the UK is in a recession the like of which we have never seen before, and that the UK banking system came close to collapse, has understandably seen sterling plummet against a basket of currencies. I have mentioned before in this column my view that the BoE had become too fixed on inflation and not the collapsing UK economy, and this has finally come home to roost. The currency markets now are trying to work out why, if the economy is so bad and about to get a lot worse, UK interest rates are still at 4.5% when in reality they should be at 2.5%. Believe me, it's only a matter of time and this will be sterling negative: look for levels against the US dollar of $1.40-1.50.
In the slowing global economy the euro had held up fairly well, but this is all about to change. The key will be EUR/$ and a target of parity for this currency pair is not a wild call. Pre-euro you would have now seen currency speculators selling the Irish punt, Spanish peseta, Italian lira, French franc and so on. Although they are now protected under the umbrella of the euro, their domestic economic problems will increase. Expect in 2009 an "every man for himself" attitude from eurozone members as they tackle these problems - this would be very euro negative.
The US dollar is riding the crest of a wave for a plethora of reasons. The unwinding of global risk appetite has seen commodities sell off; the price of oil has halved since the summer and this is very dollar positive. Hedge funds are now seeing large redemption requests from clients. These assets need to be unwound, which again is dollar positive. Despite the fact the US is very much a part of the global slowdown, it is 18 months ahead of the rest of the world, so expect to see continued dollar strength throughout 2009.
The debacle of Iceland has been well documented so I won't cover it again; however, I will point you in the direction of Hungary. The Hungarian economy is being highlighted as the next Iceland despite their protests. As we go to print the Hungarian Central Bank has raised the base rate 300 points to protect the currency. There's blood in the water and the currency markets can smell it, so expect the forint to continue to come under pressure.
For those of you seeking a safe haven from all this madness, the Japanese yen will provide you with that. It's the classic safe haven play, so expect the yen to strengthen in the coming months.
- Mark O'Sullivan, director, dealing, at Currencies Direct.
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