Pound Falls as Quantitative Easing Continues

Posted July 06, 2009

The signs of a recession still in full swing led to a weakening of the euro and a strengthening of the yen. The UK will probably expand its quantitative easing program on signs the initial program is not producing the desired results.

 

The euro fell against the yen and the Swiss franc yesterday when policy makers confirmed what savvy investors already know.  The recession is still ongoing and there is little confidence recovery is close at hand.  It is becoming more apparent every day that recovery is going to take years.

The lack of confidence and growing fears the recession has a stronger hold than believed is leading to general risk aversion investing.  The Luxembourg Finance Minister, Jean-Claude Juncker, said that “We are still in the middle of the crisis.”  The key word is “middle” because it makes it clear the recession is still deepening despite those green shoots of recovery the world likes to talk about. 

Investor demand for the euro is likely to fall as risk aversion leads to overseas repatriation of income through bond redemption.  There are 37 billion euros in bonds that will be maturing this week.

The euro weakened to 5.5152 Swiss francs per euro.  It also weakened against the Japanese yen to 133.20 yen.

The South African rand fell against the US dollar for the third day in a row as expected reports on housing and manufacturing will show continued slumping.  The condition of the South African economy is also related to the general international recession.

The rand fell to 8.0668 rand when paired with the US dollar.  The South African currency also fell against the euro to 11.1245 rands.

As would be expected in a risk aversion market, the yen strengthened broadly rising to 95.23 yen against the dollar.  The poor economic data coming from the US is creating an uncertain market and fuelling the fears the recession is far from over.

It had been hoped that once signs of economic recovery began to appear there would be a straight-line recovery.  Those hopes were dashed as mixed economic data continues to show exactly how difficult it is going to be to pull out of this recession.  In the meantime investors will continue to do what is necessary to avoid the worst risk and restore some profits.

Mexico’s peso is once again under downward pressure after current party congressional seats were lost in midterm elections.  The party of President Felipe Calderon is now faced with the challenge of implementing tax increases to plug revenue holes with a lack of enough party votes to guarantee success.  If the budget gap is not eliminated the country stands an excellent chance of having its S&P rating cut again. 

Brazil’s real weakened also to a two-week low when it fell to 1.9840 against the US dollar.  It is the pace of the economic recovery that is causing the concern.  Investors are looking for safe haven assets and shunning emerging market income opportunities.

Also falling was the UK pound.  The pound fell to US$1.6096 and to 154.23 yen per pound.  The UK central bank is considering an expansion of its program of quantitative easing and will increase asset purchases.  In other words, there might be a second round of stimulus funding in the UK such as that being discussed recently in the US. The UK central bank could buy as much as 3 billion pounds of gilts preceding a meeting where interest rates will be reviewed.

There is growing concern the US may not hold up when the recovery does begin in earnest.  The massive US debt funded by international investments is bound to take a toll at some point. That toll could very well be inflation coupled with a weakening US dollar.

That is why there is ongoing discussion concerning the role and importance of emerging markets in a global recovery.  Emerging markets might expand more quickly than developed markets like Japan and the US once the recession eases with earnest.  Equity markets in Japan, the UK, and the US and many others are expected to drift sideways for many more months making emerging market assets much more appealing.

 

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