26th January 2011
Good morning. Yesterday UK growth was expected at +0.5%. The actual figure was a DECLINE of 0.5%, raising the risk of a double dip recession in the UK. Sterling was hammered as a result, falling in a big way against all currencies. At 08:30am this morning rates are as follows:
· GBP/EUR 1.1536
· GBP/USD 1.5792
· GBP/AUD 1.5816
· GBP/NZD 2.0545
· GBP/CAD 1.5731
· GBP/CHF 1.4911
· GBP/ZAR 11.163
· GBP/JPY 129.57
· GBP/NOK 9.0872
· EUR/USD 1.3686
Sterling drops as economy shrinksSo what was the effect of GDP falling on Sterling exchange rates? The UK's economy suffered a shock contraction of 0.5% in the last three months of 2010, figures have shown. The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year. The contraction follows four straight quarters of growth.
The release is a first estimate for the quarter from the ONS and is subject to revision, but even so the figures were awful. The contraction took economists by surprise, as forecasts had been for growth of between 0.2% and 0.6%.
"This is a horrendous figure. An absolute disaster for the economy. We knew that retail sales were heavily affected and that services output would be weak, but the collapse in construction was a major contributor to the downside surprise," said Hetal Mehta from Daiwa Capital.
We have had a few GDP shocks with the economic turbulence of recent years. This one is high on the list. Even factoring in the snow effect, the gloomiest analyst predicted zero growth in the final quarter. The reality was a sharp fall in output. Not good news for those needing to buy currency with Sterling.
The effect on Sterling exchange rates
Sometimes figures are different than forecast, but not usually by such a huge amount. The result was the pound fell against all currencies, and against the Euro we are now in the €1.15's, and it was only a week ago rates were above €1.20.
The weak figures also highlight the dilemma facing the Bank of England, which needs to tackle above-target inflation but is reluctant to raise interest rates when the UK's economic recovery is still uncertain.
"The MPC [Monetary Policy Committee] must abandon any early interest rate rise until the recovery is more secure," said David Kern, chief economist at the British Chambers of Commerce.
Now there is much less chance of a rate hike in the UK, with Europe likely to raise their rates before us, there is not much to suggest we will see gains against the Euro in the coming weeks.
Getting the best exchange rates
If you need to buy Euros, or any other currency, our rates are up to 5% better than the banks offer. We don't charge commission, and our transfer fees are also much less than the bank.
The release is a first estimate for the quarter from the ONS and is subject to revision, but even so the figures were awful. The contraction took economists by surprise, as forecasts had been for growth of between 0.2% and 0.6%.
"This is a horrendous figure. An absolute disaster for the economy. We knew that retail sales were heavily affected and that services output would be weak, but the collapse in construction was a major contributor to the downside surprise," said Hetal Mehta from Daiwa Capital.
We have had a few GDP shocks with the economic turbulence of recent years. This one is high on the list. Even factoring in the snow effect, the gloomiest analyst predicted zero growth in the final quarter. The reality was a sharp fall in output. Not good news for those needing to buy currency with Sterling.
The effect on Sterling exchange rates
Sometimes figures are different than forecast, but not usually by such a huge amount. The result was the pound fell against all currencies, and against the Euro we are now in the €1.15's, and it was only a week ago rates were above €1.20.
The weak figures also highlight the dilemma facing the Bank of England, which needs to tackle above-target inflation but is reluctant to raise interest rates when the UK's economic recovery is still uncertain.
"The MPC [Monetary Policy Committee] must abandon any early interest rate rise until the recovery is more secure," said David Kern, chief economist at the British Chambers of Commerce.
Now there is much less chance of a rate hike in the UK, with Europe likely to raise their rates before us, there is not much to suggest we will see gains against the Euro in the coming weeks.
Getting the best exchange rates
If you need to buy Euros, or any other currency, our rates are up to 5% better than the banks offer. We don't charge commission, and our transfer fees are also much less than the bank.
Trade Flows: An Everyday Activity
Trade flows are an everyday activity. Almost every time that you go shopping, you’re participating in a trade flow. A trade flow measures the money related to the purchase of tangible goods and services that flows in and out of an economy. The T-shirt you bought that is made in another country involves you in a trade inflow.
Globalization has made trade flows much more common. You can be eating fruit from Central and South America on plates from Europe, while watching a show on a television made in Asia. All international trade affects currency valuation. Similar to capital flows, trade flows between different countries’ economies affects their currency values. In order to purchase a foreign good or service, you must use that foreign currency. Hence, all of these foreign transactions impact the supply and demand of those currencies and in turn, the value of the currencies.
For example, when you are in the United Kingdom and are purchasing goods from New Zealand, you must purchase those goods in New Zealand dollars (NZD). Thus, the Great Britain Pound (GBP) must be converted to NZD. This increased demand for NZD increases its worth.
Trade Balance
As a forex trader, the most important economic trade flow indicator is the Trade Balance normally released monthly for each country. A trade balance is the measure of the difference between the imports and exports of goods and services. This difference is important in identifying the overall economic activity in a country. While import trends demonstrate the strength of a domestic economy, export trends show the competitive position of the country as well as the strength of other countries’ economies.
Usually, a country that faces a significant trade balance deficit has a weak currency as a result of its constant selling of its currency; in other words, there is a surplus of its currency. Still, a country can maintain a strong currency if it counters the deficit with financial investment inflows.
When trading forex, you should keep an eye on the trade balance to gain insight into what currencies are going up and down. What trade balance trends do you see?
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Pierre Pienaar
Box 30662, Windhoek, Namibia
Tel: +264 61 243704
Fax: +264 61 247037
Cell: +264 816064888
E-mail: pienaar@iway.na
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