Friday, 03 April 2009 00:42

Today we will look at the impact of the G20 summit on exchange rates. First lets look at yesterdays movements and the forecasts for GBPEUR and GBPUSD.

Yesterday
Sterling gained broadly yesterday, rising by more than 1.5% against the US Dollar on the back of optimism about the coordinated steps after the G20 meeting of world leaders. (more on this below)

Investors were encouraged to purchase assets perceived to be risky, including sterling, after sources said the latest draft of the G20 calls for an increase of International Monetary Fund resources.

GBPEUR
Rates are looking pretty good for this currency pair, at 1.0974 at the time of writing. Rates increased yesterday after better than expected house price data for the UK, and also the expectation of a 0.5% interest rate cut by the European Central Bank. This pushed the rate over the 1.10 level.

However, when the ECB announced their decision, they have played it safe with just a 0.25% cut. The lower than expected movement caused some strength to return to the Euro, pegging rates back at around 1.0950. Today we habe Purchasing Managers index data for both the UK and EU so look out for more movement in rates today.

GBPUSD
Rates climbed yesterday following poor jobless data for the US which weakened the currency. Today is a big day for US economic data, with Unempolyment, Earnings, and March"s Non-Farm Payrolls. This is the most important piece of data abotu employment. The nonfarm payrolls measure the number of people on the payrolls of all non-agricultural businesses. The monthly changes in payrolls can be excessively volatile, and therfore often cause huge swings in USD exchange rates. The figure is expected to be -658k. Any difference either way and expect exchange rates to move immediately.

G20 and Exhange Rates
A new global deal was announced yesteday by world leaders, but the trillion dollar question is will it work? Ok, so what was agreed?

• A $250billion global fund for troubled economies
• Sanctions on tax havens and bank bonuses and tougher financial regulation
• $500billion boost for the IMF to bail out failing nations
• $250billion in support for world trade

So, not much really. Yes a trillion dollars has been made available, but it"s really not that much in the grand scheme of things. There was also no timescales. Is this money being made available now? over the next 20 years? And how much is a trillion? Well it has 12 zeros. $1,000,000,000,000.00. A million million. Given how much the US and UK have already pumped into their own flagging economies, in my view this is not really much of a rescue package.

The markets have rallied, with the FTSE and oil prices rising, in addition to Sterling Exchange Rates. However much of this can be attributed to the economic data yesterday in terms of US jobs, UK Housing data, and the ECB rate cut.

There were two crucial issues that remained almost completely unmentioned publicy, and will need to be brought in to future G20 deliberations.

Exchange rates were hardly mentioned, despite the fact that exchange rate adjustments are probably needed to try and even out unsustainable global trade imbalances. Also the position of the dollar as the world"s reserve currency was discreetly ignored after China raised the issue earlier this week.

Monetary policy and exchange rates played a large role in the onset of the crisis, and this will need to be address as part of the plan to back up a sustainable recovery. Click here to read the leaders statement in full.

I do believe that once Obama has finished his world tour and all the leaders return to their own countries, they will simply do whats needed to look after their own interests (protectionism).

I think the fact that the currency markets moved little on the news speaks for itself. It"s good that something was agreed, and also the "Obama Effect" can only be positive for the world econmoy, but most analysts still believe it will be 2010 before any recovery is evident.

The same is true for Sterling exchange rates. I think once we have our own "Obama Effect" when election time comes and new leadership takes control of the UK, confidence will return. Until then expect continued volatility in exchange rates.

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