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The AED - UAE Dirham weekly update 15 Mar 2010
In this week's
update: STERLING RIDES MOST OF THE BLOWS
Poor economic statistics and unhelpful comments rain down on sterling. Dollar beset by sentiment and data. A no-score draw.
Since the 1970s the dirham has been pegged to the US dollar at a rate of Dh3.6735 to $1. The UAE declared last year that it will not participate in the future Gulf currency union and has recommitted itself to the dollar peg. As long as that rigid link exists the sterling/dirham exchange rate will continue to depend entirely on what happens to sterling/dollar.
Sterling traded above Dh5.59 shortly after London opened last Monday and it had another look at that level late on Friday. The low came on Wednesday at Dh5.45. It opened this morning at Dh5.57, unchanged for a second week but finding itself under pressure.
In a dull week for hard data the British economy did not have a whole lot to say for itself and what it did manage to scrabble together was not particularly edifying. Two house price indices, one from the Royal Institute of Chartered Surveyors and the other from estate agents' website Rightmove, damned the property market with faint praise. The RCIS house price balance, which compares the number of members reporting higher prices with those reporting lower ones, fell from 32% to 17%; still positive but more reservedly so. Rightmove's index of asking prices went up by 0.1%; positive buy only by a technicality. UK industrial production figures were a bigger disappointment and took sterling to the lows of the week. Production (manufacturing, mining and energy lumped together) fell by -0.4% in January. Manufacturing alone was down by -0.9%. January's trade deficit was £8 billion, the biggest since August 2008. Between August '08 and January '10 Sterling's trade-weighted value became 23% weaker yet imports were up and exports were down. The significantly more competitive currency is still not having any positive effect on the balance of trade.
Sterling also had to contend with unhelpful comments from several quarters. Credit ratings agency Fitch was 'uncomfortable with the fiscal adjustment path set out by UK authorities' and looked for 'more credible and stronger fiscal consolidation plans during 2010. Credit Suisse anticipated that UK banks, collectively, would have to reduce their balance sheets by more than £500 billion over the next three or four years in order to meet new regulations. The prime minister reassured investors that Britain's AAA credit rating was solid but not all of them were convinced, especially the researchers at UniCredit Bank who predicted that the government would have problems selling all the bonds they need to shift to finance the budget deficit.
The dollar's obstacles were less easy to quantify but nonetheless problematic. Positive equity markets and an apparently robust appetite for risk among investors worked against it - and against the Japanese yen to an even greater extent - because the security of safe-havens was in less demand. The short handful of US economic data included a narrowing of the trade deficit, worse than expected weekly jobless numbers and a tiny fall in wholesale inventories. The only two statistics really to bother the market came on Friday with February's retail sales and the University of Michigan's consumer sentiment index. The good news was that retail sales were up by +0.3% despite the horrible weather. The bad news was that January's retail sales were revised downwards and consumer confidence fell by a point to 72.6 instead of rising by the half point the market had been expecting.
As much as any of the above, the dollar's fortunes depended on technical support and resistance levels and the whim of investors. There is a greater than usual degree of uncertainty about which way the dollar 'ought' to be going. A technical argument can be made for seeing the dollar go lower, not just against the pound but against the euro and other currencies. Yet the US economy is performing better than any other G7 nation at the moment, which should protect the currency from unreasonable ill-treatment.
Sterling surprised many with another refusal to lie down last week despite a string of potentially damaging developments and data. However, as long as the opinion polls continue to indicate a hung parliament investors will continue to fear that even after a general election Britain's government will be unable or unwilling to tackle the budget gap. Buyers of the dirham should hedge at least 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.
For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000. Alternatively go to www.moneycorp.com where you can open a free, no obligation Trading Facility.
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