Greenback Falls from Grace
The following update is from the trusted currency exchange firm World First.
The dollar sharply reversed its strengthening trend last week, as worldwide optimism continues to grow, and questions were raised about the United States’ fiscal stability. The currency darling of early 2009 continued its dramatic fall from grace, as it managed to shed over 4% against both the pound and euro over the week.
The greenback has performed strongly throughout the credit crises, as investors flocked to the safe haven appeal of the dollar and US denominated securities. Enjoying the mantle of the world’s reserve currency, it benefited in part from the safety of the US government’s AAA credit rating. However, events last week brought into the limelight the validity of this position.
Ratings agency S&P downgrading the UK to ‘negative’ from ‘stable,’ concerned that debt levels may reach 100% of GDP by 2013. But it was a case of down the elevator and up the stairs for the GBP/USD cross, as the immediate selloff was followed by a gradual return of strength for the pound, as the initial shock of a possible sovereign debt downgrade for the UK spurred questions into the likelihood of a downgrade for the US itself. For the US, the combination of a current account deficit, high levels of debt and an ongoing quantitative easing program means makes the dollar look like a riskier prospect than previously, and has contributed to the selloff of late.
Further damaging the dollar’s prospects are signs that the financial system looks to be healing, as illustrated by two important measures of well-being of the financial system, the VIX index, and the 3 month LIBOR spread. Both this indicators returned to levels not seen since before the Lehman’s Brothers meltdown, a clear signal that times are improving.
The 3-month LIBOR spread is a classic barometer of how much banks trust lending to each other, and suggests that credit markets are thawing out in response to government interventions. The VIX index, or the ‘fear gauge’ for investors measures volatility in equity movements, and shows that equity markets seem to have consolidated, or at least paused at their current levels, a prerequisite of a global recovery.
With investors dipping their toes back into the market and chasing high yielding currencies, it wasn’t surprising to see the Australian and New Zealand dollar climb strongly over the week against the dollar, as did emerging markets currencies in general. The Indian rupee rose to five month highs amid optimism around possible economic reforms from the returning Prime Minister Manmohan Singh.
Data out this week with look to reaffirm the notion of green shoots sprouting, which are dollar negative. Most of the data is US centric this week, starting with a consumer confidence figure this afternoon. We look for further upside surprises to continue with new and existing home sales later in the week. The euro zone has an unemployment and CPI figure to contend with on Friday, while the UK also looks to the housing market with new home sales and nationwide housing prices
Trade of the Week
This week’s trade of the week is a Participating Forward Plus for a seller of GBP and a buyer of Euros.
This zero premium option gave the client a worst case rate (WCR) of 1.11 and the ability to participate in 75% of favorable movement upwards of the WCR
If, on expiry, GBP/EUR is below 1.11, and above 1.07, the client can buy at 1.11. If, on expiry, GBP/EUR is below 1.07, for every percent that the rate is below 1.07, the WCR (1.11) also falls by a percent. If, on expiry, GBP/EUR is above 1.11, the client is able to participate in 75% of the movement upwards. For full details of this structure please contact one of our options traders on 0207 801 9050.
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Please feel free to contact me () if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact World First Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.
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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are subject to change without notice.
Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms.
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