Better for Britain and worse for the US

Fresh Produce Journal, 06 Sep 2010

This week on the currency markets

Friday’s revised figures for gross domestic product (GDP) in the second quarter of the year were better for Britain and worse for the US, writes Chris Redfern, senior business client dealer at Moneycorp. Britain’s GDP grew by 1.2 percent instead of 1.1 percent originally estimated, while the pace of US expansion was slashed from 0.6 percent to 0.3 percent. Investors did not have the foggiest idea what to do about either figure. Britain’s better than expected number actually provoked a minor sell-off after the announcement. Investors saw the elevated GDP figure almost as an economic swansong. Government austerity measures are bound to slow things down – the only question is by how much. As for the weaker US performance, investors had already been primed to expect a downgrade. They were just relived it was not worse.

A different confusion of cause and effect on Monday allowed the Japanese yen to strengthen after an announcement that the Bank of Japan (BoJ) would increase its supply of cheap lending from ¥20 trillion to ¥30 trillion. For any other currency it would have been bad news.  For the yen it was great: if the authorities in Tokyo were scared, investors needed to stick up on the best safe-haven currency around… the yen. It strengthened by 2.7 percent against the euro and the pound in the following 36 hours. There is talk of the BoJ selling the yen in order to hold it down. However, without co-operation of other central banks (unlikely because they have no vested interest in a more competitive yen) such intervention would probably be effective only in the very shortest term.

The foreign exchange market is flying. Last week’s favourite was the Swiss franc, simply as it was the only currency for which nobody had a bad word. It would be no surprise to see a repeat this week.