Growth optimists in the UK appear to be banking on a strong export-led recovery. Yesterday’s data continues to cast doubt on the validity of this view, despite the continued weak value of sterling, the UK has thus far found itself unable to improve its trade balance, which has been on a downwards trend since November 2008 and yesterday figures showed that the balance has dropped to its lowest level on record.
Yesterdays figures are still affecting the strength of the pound. Trade balance figures don’t usually have much of an impact on the currency markets, they are generally considered a low impact release but when the trade balance is the highest on record and everyone is expecting an export led recovery due to the de-valuing of the currency that’s when the markets sit up and listen.
The pound dropped right back to support against the dollar (1.5380) and it continues to drop back against the Euro, who also happen to be our main trading partners and the most susceptible to trade balance figures. The simple equation is that if we are importing more goods and services than we import then the currency transfers will predominantly value the Euro higher.
The picture isn’t quite as simple as that with the majority of transactions happening for speculative reasons.
“July’s dreadful UK trade figures cast further doubt over the ability of the external sector to drive the recovery once the boost from government and consumer spending fades.”
Vicky Redwood, senior economist at Capital Economics.
“Nonetheless, a significant turn-around in the trade balance looks unlikely when the improvement in the survey measures of export orders has ground to a halt and the global recovery is showing tentative signs of faltering.”
These tentative signs of faltering have helped to boost the ‘safe haven’ currencies yet again, with the bears siding with the usual, Dollar, Yen, Swissy currencies and the Bulls buying up the Australian Dollar, Canadian Dollar and Euro.
House prices in England have historically had a heavy impact on the value of the pound and this week has been no exception. The Halifax house price data is still buoying up the economic strength models that traders use to value currencies. However S&P credit analyst Neil Monro thinks that the future
“We expect house price movements to remain uncertain in the near term, and we note that a high percentage of non-conforming borrowers remain in severe arrears. Therefore, possible future increases in unemployment or interest rates may cause a further wave of repossessions,” said.
The Stock markets have has opened flat with little sign of that changing after a lack-lustre first hour. US shares tailed off towards the end of day on Wall Street and that has had some impact.
Banks are still going well ahead of the new capital rules to be unveiled by BIS on Monday. Royal Bank of Scotland leads the sector on hopes that the rules will be easier than feared. A broker note suggesting Lloyds has more money than it knows what to do with has also helped the mood.
New capital requirements for banks going forward have shown that UK banks are flush with dough compared with European banks who might not have enough wax to last the winter. Currency transfers have been sublime overnight.
