Poor public finance data nudges sterling lower

Sterling took a step lower against the euro today and moved very slightly lower against the US dollar after UK data was released showing unexpectedly high public borrowing figures for November.

The Public Sector Net Borrowing Requirement result has called into question whether the government can meet its deficit-cutting target. The figure came in at almost £23billion in November, up from targets and last year’s figure of £17billion. The data, in conjunction with recent weak retail sales data, has shifted focus onto the state of the UK’s fragile recovery and its ability to grow in Q1 next year.

Despite this momentary blip, focus will undoubtedly return to the state of the EU and its debt crisis. Having had Ireland’s credit rating reduced to that of Trinidad & Tobago, Moody’s has now put Portugal on review for a possible (imminent) downgrade. Expect to see this saga continue throughout 2011.

In other news, the Swiss franc is continuing its bull charge as it smashes through all time highs against all of its major counterparts.

Tom Hampton
Analyst – Caxton FX

Downgrade risk hurts the euro

The euro is continuing to weaken on speculation European nations will struggle to raise funds after Ireland suffered a five notch credit downgrade.

Ireland’s repositioning just above ‘Junk status’ has sparked renewed concern over the future of other indebted nations in the eurozone. In response, the single currency depreciated against most of its major counterparts including a two week low against the US dollar and Japanese yen, as well a record low against the Swiss franc.

Sentiment is very bearish towards the sixteen nation currency with the prospect of further downgrades looming overhead before the long Christmas break. Whispers in the market point to even France being in the crosshairs of Moody’s et al as the cost to insure French government debt has trebled this year. The abundant credit warnings and increasing speculation over the spirally debt crisis have left the euro looking particularly vulnerable as we head into the new year.

Divisions within the European Central Bank are also not helping the situation. European finance ministers have ‘serious concerns’ that the Irish draft legislation to fix the banking system may threaten the ECB’s ability to run its liquidity operations.

In other news, the aussie dollar continues its run of good fortune as it hits a 25 year peak against the pound and the euro following the Irish downgrade.

Tom Hampton
Analyst – Caxton FX

Euro has a momentary bounce

The euro has managed to claw back some of its losses as a three day selling spree lost steam. However, doubts still remain whether the eurozone can contain debt problems.

Rumours that the EU are looking to be more proactive in dealing with Portugal and Spain than they were with Ireland, has sent the single currency back up to $1.3143 and €1.1885 against the US dollar and sterling respectively. The news has also tightened (very slightly) bond premiums in Portugal, Spain and Italy over their German counterparts. An announcement tomorrow from the ECB will help to clear up these rumours, although the 16-nation currency still remains vulnerable to more heavy selling.

Another angle on this could be that the EUR has fallen at such a rate the market has been caught short of euros and investors are taking a ‘breather.’ Expect to see further selling resume after the ECB meeting on Thursday.

More good news this morning about the state of the UK economy, as better than expected Manufacturing PMI data gave the pound a short boost. The index came in at 58 for November, greatly exceeding the market predictions of 54.8. This is a 16 year high for the index. PMI data from the construction and service sectors are due tomorrow, but it would seem that the UK recovery is gaining traction.

Tom Hampton

Analyst – Caxton FX