To ensure future weekly updates get to your
inbox, please add: @moneycorp.msgfocus.com to
your safe list or email address book.
The AED - UAE Dirham weekly update 29 Mar 2011
In this week's
update: STERLING ON THE RETREAT
UK growth worries increase as hopes of higher interest rates fade. Two Fed presidents speak up for tighter US monetary policy.
The dirham has been pegged to the US dollar since the 1970s at a rate of Dh3.6735 to $1. That fixed link means the sterling/dirham exchange rate depends entirely on what happens to sterling/dollar. The Emirates have opted out of the long-awaited single Gulf currency so that relationship will continue indefinitely.
Sterling began the week looking good, rising by six fils to its best level in 14 months. The rot set in on Tuesday and it spent the rest of the week in retreat. By the time London opened this morning it nothing to show for its efforts but a ten-fil loss.
It was Tuesday's consumer price index (CPI) data that market the turning point for sterling. Up to that point there had been a lingering hope that the Monetary Policy Committee would eventually decide that it must do something about Britain's high inflation rate, especially if it turned out to be as high as the 4.2% analysts were predicting. In the run-up to the CPI announcement many investors took precautionary long positions, buying sterling in the speculation that the figure might be even higher. They turned out to be correct in their supposition but wrong in their assumption that sterling would go up.
CPI rose by 4.4% in the year to February and the pound went down. Initially it fell as those long positions were sold off. The suspicion grew that Bank of England governor Mervyn King would continue to shepherd his MPC along the path of policy relaxation however high the rate of inflation. A day later, the minutes of the March meeting showed that there were indeed still only three members of the committee in favour of an interest rate increase.
Hours after the minutes were published the chancellor of the exchequer delivered his 2011 Budget speech. In it he gave tacit approval to the MPC's stance, saying that inflation of up to 5% this year would fade to 2.5% next year and 2% thereafter. He confirmed that the inflation target remains at 2% but gave no impression that the MPC was under any pressure to achieve it. Also in the speech he delivered the widely-anticipated downgrade to estimates of economic growth; 1.7% for this year, rising to 2.5%, 2.9% and 2.8% in the following three years. Friday's retail sales figures for February rammed home that new reality. After a tolerably successful January Sales season turnover in February was down by -0.8%. It was not a figure calculated to do sterling any favours.
Nor were most of the US data of any help to the dollar. In fact of many of them were downright bad. Existing home sales fell by -9.6% in February and new home sales were down by -16.9% to their lowest level since records began four decades ago. Durable goods orders fell by -0.9% and the University of Michigan's index of consumer sentiment dropped by ten points to 67.5. The one glimmer of light was fourth quarter gross domestic product. It was revised up to an annualised 3.1%, representing quarterly growth of 0.8%.
Of greatest help to the dollar was the market's fading affection for the euro as a result of the collapse of the Portuguese government and the failure of the EU summit meeting to achieve final sign-off for the permanent stability fund. With the yen out of bounds because of G7 intervention investors' only real alternative to the euro was the dollar.
On Friday and over the weekend the dollar found added support after two regional Federal Reserve presidents spoke out. St Louis's James Bullard called for a review of the second round of quantitative easing, suggesting it might not need to run its whole course to June. His colleague in Philadelphia, Charles Plossser, said the Fed should now be setting out a strategy for selling the assets gathered during its QE programme and preparing to raise interest rates. The two men are still in a minority among the Federal Open Market Committee but their comments provided welcome (to the dollar) evidence that there are two sides to the policy debate.
A reminder of Britain's struggling economy will come on Tuesday with the revision to fourth quarter GDP growth, previously estimated at -0.6%. House price indices from Nationwide and the Halifax are pencilled in for the end of the week and are unlikely to deliver any positive surprises. The main event for the dollar will be Friday's employment data, specifically the change in non-farm payrolls. An increase of 192k is expected, roughly in line with the previous month's figure.
Having hit a 14-month high and a two-month low in the space of less than a week sterling is on the ropes. Nothing stands in the way of a further eight-fil decline to the lows of late January and if that level were to give way another 14 fils of losses would be on the cards. Buyers of the dirham should increase the proportion of their hedge, fixing a price for at least half the money they will need.
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.
TTT Moneycorp Limited has been certified
to ISO 9000 Quality Assurance since 1996
Moneycorp is a trading division of TTT
Moneycorp Limited. This publication has been provided for general
information only. Neither TTT Moneycorp Limited nor any person
involved in this publication accepts any liability for any loss or
damage whatsoever that may directly or indirectly result from use
made of any opinion, information, data, representation or omission,
whether negligent or otherwise contained in this publication.
None of the information contained in this email
constitutes, nor should be construed as Financial Advice. Copyright
2005 TTT Moneycorp Limited.
This email and any attachments
are confidential and may be privileged and are intended solely for
the use of the named recipients. If you are not the intended
recipient, it is prohibited and may be unlawful to use or copy this
email for any purpose or disclose its contents. The views expressed
may not be the views of TTT Moneycorp Ltd and should not be relied
upon. If you have received this communication in error, please
notify TTT at disclaimer@ttt.co.uk
immediately by email or by telephone (+44 20 7823 7700) before
deleting it. Please be aware that emails and attachments may contain
viruses. Thank you for your co-operation.
TTT Moneycorp
Limited is a company registered in England under registration number
738837. Its registered office address is 2 Sloane Street, London,
SW1X 9LA.
To unsubscribe yourself from this mailing list please
follow this link
[*track.css*]
[*track.hidden*]
