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Money flowed to the perceived safe havens of poor US and Euro zone retail sales) were largely
IntroductIon the US Dollar, Japanese Yen and Swiss Franc.
New Zealand, Canada and Australia cut interest
ignored as stocks forged ahead. Risk appetite
caused the US Dollar to slide, allowing Sterling
2009 has seen dramatic changes in exchange rates whilst the ECB left rates on hold at 2%. to break through the $1.50 barrier. Euro zone
rates; interest rates have been cut to historic inflation remained positive, which benefited the
lows and new stimulus packages have been UK unemployment rose to 6.3%, the BoE cut Euro, whilst deflationary fears weighed on the
introduced to kick-start a global economic interest rates to 1% and the Halifax House Price Pound; the Retail Price Index (RPI) showed the
recovery. Survey surprised all by showing a 1.9% increase. first annual drop since 1960.
Sterling benefited, reaching highs of €1.15 and
In our review, we look at how these events have US$1.49. IMF analysis predicted the global economy
influenced Sterling and identify the winners would shrink by up to 1% during the year. In the
and losers in 2009. We also look at the year President Obama launched a $787bn stimulus Budget, debt was forecast to reach 68% of GDP
ahead to see how Sterling could fare as the plan, partially in response to huge US job losses and analysts began to talk about the risk of the
global economy emerges from recession. in February, but it failed to have the desired UK losing its coveted AAA credit rating.
short-term effect of boosting confidence.
To help you navigate through these uncertain May - Global optimism continues
times, we have asked leading financial experts March -Quantitative Easing begins
for their views on what might be in store for e Nationwide Consumer Confidence index
currency markets. e survey includes expert e Euro gained as recovering stock markets recorded large gains in April. e BoE increased
opinions from: JPMorgan; Lloyds TSB; increased risk appetite for the Euro’s relatively the capacity for quantitative easing by £50
Neptune; RBS; Royal London; Schroders; high interest rate; however, in the wake of poor billion, whilst the ECB cut rates to 1% and
Standard Life Investments; IG Index; GDP figures, the ECB cut rates to 1.5%. e unveiled a plan to purchase €60bn of covered
Henderson and Nomura. Please note that Australian Dollar benefited from the surprise bonds to boost liquidity, but was quick to confirm
making predictions in a rapidly changing decision to keep its interest rates on hold, whilst that it was ‘credit easing’ and not QE; the Euro
economic climate is not an exact science and Canadian interest rates were cut to 0.5%. strengthened to reflect market approval.
these forecasts are opinion only and not advice.
Meanwhile, as stock markets continued to rally,
Quantitative Easing explained: risk appetite favoured the relatively high-yielding
Australian Dollar (3% interest rates). Positive
2009 revIew e creation of central bank money normally
used to purchase government and corporate
Australian retail sales and employment data,
coupled with a cautiously optimistic Central
January - Interest rate cuts & President bonds. e aim is to increase the money supply, Bank caused Sterling/Australian Dollar to fall
Obama’s inauguration and therefore stimulate the economy by below A$2.00 for the first time since 1996.
increasing spending and output. e increase in
January saw the Bank of England (BoE) cut supply and potential inflationary pressure can be e Canadian Dollar strengthened against
interest rates to 1.5% as Gross Domestic Product negative for a currency in the long-term. Sterling to an intra-month high of C$1.74 as a
(GDP) figures confirmed the UK was in result of increasing commodity prices. e US
recession. Euro zone recession provoked the Federal Reserve’s bank “stress-tests” went as
European Central Bank (ECB) to cut rates to e US Federal Reserve announced a planned and optimism was further fuelled by
2.0%. e Pound recovered from near parity quantitative easing programme to purchase $300 better than expected US employment figures.
against the Euro to reach a month-high of €1.13. billion of long-term Treasury debt and up to
$1.25 trillion of mortgage-backed securities. is June - UK interest rates and QE on hold
Whilst the UK’s trade deficit widened to a record was well received by stock markets, but the
£8.33bn, the US trade deficit shrank by 28.7% Dollar fell. ECB President Trichet was cautiously optimistic
(the largest fall in 12 years), as imports were that the Euro zone economy could start to
driven down by weak demand and falling oil e International Monetary Fund (IMF) recover in 2010. e BoE minutes noted that
prices - Sterling fell to US$1.35. commented that the UK economy could lag Sterling’s recovery might represent a more
behind a global recovery. UK unemployment positive view of the UK’s prospects compared
President Obama’s inauguration did little to help broke the two million barrier and the BoE cut with other major industrialised economies; partly
financial markets as poor economic and rates to 0.5%. e much debated quantitative owing to UK industrial production expanding,
corporate data caused stock markets to fall and easing programme to buy gilts and corporate whilst the Euro zone’s weakened.
risk aversion to increase. As a result, Sterling bonds caused Sterling/Euro to reach a month-
struggled against the Swiss Franc and Japanese low of €1.05. UK data showed the economy grew in April and
Yen, but gained against the Australian Dollar, May, pointing towards growth in the second
New Zealand Dollar and South African Rand. April – The ECB cuts rates but no QE quarter of 2009. Inflation stood above the BoE’s
target at 2.2%, helping Sterling to strengthen as
February - Dow Jones falls by 11.6% e ECB cut interest rates by less than expected easing deflationary fears fuelled interest rate rise
and the FTSE 100 by 6% to 1.25%, but didn’t announce quantitative easing speculation.
measures. e BoE left interest rates on hold and
Fears of a deeper and longer recession caused continued with its £75 billion QE programme. Despite favourable US employment data,
markets to fall and risk aversion to increase. Weak economic data (US jobless claims, and pessimism then returned and stock markets fell
2
on concerns of a protracted recovery. e September – Sterling weakens against 3.25%) in 2009.
Rightmove house price index fell by 0.4% in May higher-yielding currencies
(the first drop since January), and retail sales November – UK Government credit-
dropped 0.6%. Sterling, whilst stronger than Comments from the Bank of Canada, US rating fears return
earlier in the year, seemed to lack direction. Federal Reserve and ECB, indicated that their
interest rates would be unlikely to change before e BoE expanded QE to £200 billion. UK out-
July - Recovery balanced on a mid-2010. e BoE did not expand QE, but put fell suggesting that any UK recovery in the
knife-edge commented that a sustained recovery remained final quarter of 2009 could continue to lag global
uncertain and that further QE expansion might counterparts. e public sector deficit hit a record
Speculation of QE expansion increased as UK be needed. for October as Government spending exceeded
inflation dropped below the 2% target (the first receipts by a greater than expected £11.4 billion.
time since Sept 2007) and second quarter UK e Australian Dollar hit decade-plus highs Fitch credit rating agency said that the UK was
GDP showed the worst figures since records against Sterling as its economy, having avoided the most at risk amongst the major economies of
began in 1955. recession, grew by 0.6% in the three months to losing its top AAA credit rating. Governor King
June. Higher commodity prices and interest rates commented that Sterling's decline would be
Conversely, second quarter US GDP showed a helped the South African Rand to register its helpful in boosting exports, and this seemed to
better than expected annualised contraction of highest level against the Pound in over three leave the door open for more QE.
1%. Rising house prices and a surge in home years.
sales, suggested a stabilising US housing sector. e US Federal Reserve indicated interest rates
Good US corporate earnings pushed the Dow Growth in Euro zone service sector activity and would be low for an extended period, and com-
Jones up 8% in July, but served as a hindrance to factory output, plus positive inflation data pushed ments from the Russian Central Bank that it
the Dollar, as risk appetite moved money away the Euro further ahead against Sterling. e would diversify its currency reserves hurt the
from the perceived Dollar ‘safe–haven’ to UK’s annual consumer inflation rate dropped to Dollar further. Market instability was also
currencies with a better return (higher interest 1.6%, but this was higher than anticipated and reignited by Dubai's request to delay its debt re-
rate). initially supported Sterling. Any gains were payments.
short-lived following worsening unemployment
e ECB rate remained at 1%, but falling figures. e G20 meeting offered little direction, e Euro zone joined the camp of major
inflation pointed towards the need for sustained but cited job creation as a key requisite for economies to move out of recession. e latest
stimulus measures. e IMF estimated the Euro unwinding stimulus packages. South African GDP figures revealed it too had
could be overvalued by up to 15% against a exited recession and Australian interest rates in-
basket of currencies. Commodity-related October – the US economy exits creased to 3.5%.
currencies, including the Australian, New recession
Zealand and Canadian Dollars were amongst the December – Interest rates remain at
best-performing as global recovery hopes Lower than expected UK inflation and failure to rock bottom
boosted commodity prices. escape recession raised concerns that the BoE
would expand QE in November. Positive news e Central Banks of the UK, US and Euro zone
August - Sterling declines against every came from increases in UK mortgage approvals, left interest rates at record lows. is marked no
major currency and house prices (according to Nationwide), and change to interest rates in the US for the whole
an unchanged unemployment rate. of 2009, and no move in UK and Euro zone in-
e BoE’s pessimistic outlook and an unexpected terest rates since March and May respectively.
£50 billion QE expansion, kept Sterling under Euro zone manufacturing activity and service However, the US Federal Reserve and ECB both
pressure. e US Federal Reserve and ECB sector activity improved, whilst German business cited improving economic and financial market
made no changes to interest rates or stimulus confidence rose to a 13-month high. However, a conditions as being sufficient to withdraw some
measures. e ECB was upbeat, citing a slowing fall in consumer prices, employment and a stimulus measures put in place to support their
Euro zone recession, whilst the Federal Reserve slowdown in money supply growth, raised fears economies.
expected to keep interest rates low for a of sustained low interest rates. e US economy
prolonged period. exited recession, but with mixed economic data Sovereign credit-rating fears remained in sharp
the Federal Reserve remained wary of how the focus, with Spain’s credit outlook cut to negative
UK data included the biggest fall in business economy would perform if Government stimulus from stable and a downgrade for Greece on ac-
investment for 24 years and a further rise in were to be withdrawn. e Dollar weakened count of deteriorating public finances.
Government borrowing during July. Stock following a lift in risk appetite.
markets continued to rise and positive US and Global stock markets generally continued to per-
Euro data overpowered the mixed news coming A fall in the annual rate of inflation helped the form strongly, whilst gold prices retreated from
from the now lagging UK economy. Bank of Canada to maintain its commitment to record highs of over US$1,200 per ounce. Aus-
keeping interest rates on hold until mid-2010. tralian interest rates rose by 0.25% for a third-
US jobless figures recorded the smallest drop e New Zealand and Australian Dollars successive month, to 3.75%. Buoyed by investors’
since August 2008, German and French (commodity currencies) were boosted by robust increased risk appetite, the Australian Dollar,
economies were now showing growth and Chinese economic growth data (a major trading New Zealand Dollar, and South African Rand
European investor sentiment rose to a one-year partner). New Zealand looked set to hold interest all avoided significant losses against Sterling.
high. Meanwhile, UK consumer confidence rates whilst Australia became the first G20
remained flat for a third consecutive month. nation to increase interest rates (from 3.0% to
3
2009 exchange rate charts
S
Sterling/Euro (GBP/EUR) Sterling/US Dollar (GBP/USD)
1.20 1.75
1.18 1.70
1.16 1.65
1.14
1.60
1.12
1.55
1.10
1.08 1.50
1.06 1.45
1.04 trend line 1.40
1.02 exchange rate 1.35
1.00 1.30
17
17
17
17
17
17
17
/1
/1
17
17
17
/3
/6
/9
/1
/1
2
2
/3
/6
/9
/
/0
/0
/0
/0
09
2/
2
/0
/0
9
/0
9
8
09
0
9
9
8
S
Sterling/Canadian Dollar (GBP/CAD) Sterling/Australian Dollar (GBP/AUD)
1.95 2.40
1.90 2.30
1.85 2.20
1.80 2.10
1.75 2.00
1.70 1.90
1.65 1.80
1.60 1.70
17
17
17
17
17
17
17
17
17
17
/1
/1
/1
/1
/3
/6
/9
/3
/6
/9
2/
2
2/
2
/0
/0
/
/0
/0
/0
/0
09
09
0
0
9
9
9
8
9
8
2.90
1.85
2.80
1.80
2.70
2.60 1.75
2.50 1.70
2.40
1.65
2.30
1.60
2.20
2.10 1.55
2.00 1.50
17
17
17
17
17
17
17
17
17
17
/1
/1
/3
/6
/9
/1
/1
/3
/6
/9
2/
2
/0
/0
2/
2
/0
09
/0
/0
0
/0
09
9
09
9
8
9
8
S
Sterling/Japanese Yen (GBP/JPY)
17
17
17
/1
/1
/6
/9
2
2
/0
/0
/0
/0
09
9
8
4
2010 outlook
Last year’s survey saw our respondents correctly predict further interest a thriving economy will typically attract more investment and capital
rate cuts and the introduction of quantitative easing to boost the economy. inflows, and export more goods. To invest, or to purchase a country’s goods
e majority thought that the UK recovery would lag behind the US and and services, investors and consumers will need to purchase that country’s
Euro zone, with the UK recession lasting up to the end of 2009. It was currency, causing the currency to appreciate. With many countries having
estimated that UK interest rates wouldn’t rise until the second half of 2010. exited recession in the third quarter of 2009, the focus is now on the
comparative rate and sustainability of that recovery.
e exchange rate forecasts made in December 2008 were made at a
unique time in financial markets. Whilst predictions were close on
currencies with low interest rates, the recovery in higher yielding currencies UK economic growth forecast for 2010
such as the Australian Dollar has surprised many.
<0%
We preface this year’s report by again saying that exchange rates are
notoriously difficult to forecast given the numerous factors which 0% - 1%
influence them. Our aim is not to advise you, but help keep you abreast
1.1% - 2.5%
of the latest opinions in the foreign exchange market by asking ten leading
market professionals for their outlook. 2.6% - 4%
In 2010 the debate will focus on the impact of actions taken by Central
Banks and Governments, coupled with the sustainability of economic
recovery. For Sterling’s sake, a General Election will determine who holds Euro zone economic growth forecast for 2010
the reins to the UK’s recovery, but reducing debt needs to be high on the
campaign agenda to keep the UK’s credit-rating strong. Global risk
appetite will again be a critical factor influencing exchange rates, and the <0%
potential for raising interest rates could also become a decisive factor. 0% - 1%
1.1% - 2.5%
Outlook for next interest rate rise 2.6% - 4%
60%
UK
Euro zone
50% US economic growth forecast for 2010
US
% of respondents
40% <0%
0% - 1%
30%
1.1% - 2.5%
20% 2.6% - 4%
10%
5
e global recession has been fought with coordinated Government Key factors which could favour the Euro over Sterling:
spending, aggressively lowered interest rates as well as more Conversely some experts thought that UK interest rates could remain
unconventional monetary policies. Our survey asked respondents to rate lower for longer compared with the Euro zone. Clive Dennis,
how the UK, European, and US Central Banks had implemented policy Currency Fund Manager at Schroders, highlights “very loose”
during the past twelve months, and whether these economies are now monetary policy and quantitative easing as negatives for Sterling.
well-positioned to achieve sustainable growth over the next five years. Dennis also cites “political risk” in the UK – and as pointed out by
Jonathon Griggs, Head of FX Strategy at JP Morgan, the outcome of
the UK General Election could be “absolutely critical”. Expected
Central Bank/growth sustainability rating reforms to tackle the UK’s deteriorating public finances could be
hindered if neither major political party secures a clear election victory,
5.00
potentially unnerving international investors.
Central Bank approval
Growth sustainability Outlook for Sterling/US Dollar:
Rating (1 = poor, 5 = good)
4.00 Half of those surveyed predicted that Sterling would end 2010 lower than
$1.60, but only 10% predict a fall to below the $1.50 level. 20% predict
Sterling to make headway above $1.70, with 10% forecasting a return
above $1.80.
3.00
6
Predictions for Sterling against major currencies, end 2010
50% 40%
40%
30%
% of respondents
% of respondents
30%
20%
20%
10%
10%
0% 0%
<0.90 0.90 - 1
.00
1.00 - 1
.10
1.10 - 1
.20
1.20 - 1
.30 >1.30 <1.40 1.40 - 1
.50
1.50 - 1
.60
1.60 - 1
.70
1.70 - 1
.80 >1.80
80%
40%
60%
30%
% of respondents
% of respondents
20% 40%
10% 20%
0% 0%
<0.50 1.50 - 1
.65
1.65 - 1
.80
1.80 - 1
.95
1.95 - 2
.10 >2.10 <1.40 1.40 - 1
.60
1.60 - 1
.80
1.80 - 2
.00
2.00 - 2
.20 >2.20
60%
40%
60%
% of respondents
% of respondents
30%
40% 20%
20% 10%
0% 0%
<1.75 1.75 - 2
.00
2.00 - 2
.25
2.25 - 2
.50
2.50 - 2
.75 >2.75 <1.50 1.50 - 1
.60
1.60 - 1
.70
1.70 - 1
.80
1.80 - 1
.90 >1.90
80%
% of respondents
60% we hope that you have found these opinions insightful, and above
all useful. Please remember that predictions can only be based on
40% information currently available.
20%
If you have a foreign exchange requirement in 2010, we’re here to
help. details of the hl currency Service can be found page 8, but
0%
please contact our currency specialists on 0117 311 3257 if you
<100 100 - 12
5
125 - 15
0
150 - 17
5
175 - 20
0 >200
have any questions.
exchange rates
7
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