Royal Alliance Capital Currency Report

Euro slips on Greece woes

Sterling found some momentum against the euro last week, reaching highs of €1.1662 on Friday. Concerns Greece might ultimately default on its debts, prompting large losses for European banks which own Greek government bonds, continued to weigh on the euro.

The German parliament voted to approve a higher contribution to the European Financial Stability Fund, the region’s communal bailout fund.

The Fund’s expansion is required for the second Greek bailout which was arranged in July, but is yet to be endorsed by votes in Malta, the Netherlands and Slovakia. 

Greece remains in talks to secure the next installment of 8 billion euros which it needs to avoid bankruptcy in October.

Euro zone business and consumer confidence deteriorated in September, whilst a surge in euro zone inflation to a three-year high of 3% weakened the case for the European Central Bank (ECB) to cut interest rates this week.

Despite the euro zone’s crisis, the sterling/euro rate is little changed compared to a year earlier. 

This suggests markets are wary of the UK’s close ties to the euro zone via banking sector and trade links. 

Nationwide house price data and Confederation of British Industry retail trade data gave little encouragement over the domestic outlook; house prices continued to ‘tread water’ last month, whilst trading on the high-street was the weakest for 16 months.
 
Sterling gained versus the US dollar, but still ended the week more than 6% lower than its recent peak at US$1.6618 on 19 August. Falls in sales of new and existing homes highlighted the US housing market’s continued malaise. 


US house prices were 4.1% lower in July compared to a year earlier. US second-quarter Gross Domestic Product (GDP) growth was revised up from 1.0% to 1.3% on an annualized basis, helped by stronger than previously estimated exports and consumer spending.

Commodity-bloc currencies such as the Australian, New Zealand and Canadian dollars dropped versus sterling; tending to lose ground as commodity prices weakened owing to concerns over the global growth outlook. 

Australian and Canadian domestic influences were limited; Australian jobs vacancies data gave some encouragement to the employment market outlook, whilst Canadian GDP growth of 0.3% in July was in line with market forecasts. The New Zealand dollar lost some support after a surprise credit rating downgrade by the Standard & Poor’s and Fitch credit rating agencies.

The EUR/CHF rate traded in a range between 1.2122 and 1.2263, having held above the 1.20 ‘minimum’ rate set by the Swiss National Bank on 6 September 2011. This enabled sterling to rise as high as 1.4177 versus the Swiss franc; its highest level since May.