Currency update June 23: market reacts positively to yesterday's Budget

Published: 23 June, 2010

Currency update June 23: positive reaction to the Budget helps sterling gain against the euro and the US$.

Currency rates: June 23 AM
EURO/GBP - 1.209
US$/GBP - 1.486
CHF/GBP - 1.644
CAN$/GBP - 1.530
AUS$/GBP - 1.705
ZAR/GBP - 11.271
JPY/GBP - 134.49
HKD/GBP - 11.567
NZD/GBP - 2.099
HUF/GBP - 338.20

Yesterday we had the first Budget from the new coalition government. The reality of the Budget was very much as expected given the huge hole in the public finances and the need to match income to expenditure.

And it is often stated that it is best to get all the bad news over quickly rather than dragging it out and prolonging uncertainty and undue suffering. So the new Chancellor laid out a very clear plan of action stating what was going to be done and how.

The financial markets initial reaction has been positive which is important to sterling's stability in the currency market as we have to remember that lenders to this country have to be convinced that we will be able to service our debt longer term. Sterling has gained against both the euro and the US$.

The one unknown is what the effect of the cuts in expenditure, the increased VAT and austerity measures elsewhere in the world will have on growth in the UK economy, but the belief is that we will avoid a double dip recession. So we have taken a small step forward but the level of uncertainty is still high and that is why it is important to get in touch now and minimize the chance of losing out.

The Eurozone is still suffering. On Monday we had the head of the Bank of France state that certain banks were beginning to find increased funding problems. This is what happened before Lehman Brothers went bust. The reason given is that the European Central Banks 12 month loan facility totaling €442 billion comes to an end this month but this is to be replaced with a similar sized stabilization facility so we should see this pressure ease.

We also saw some downgrading of some French banks credit ratings which also knocks confidence in the Eurozone and the euro which continues to weaken.

The US$ has been trading in a narrow ranger against sterling for the last few days.

The major news over the weekend was the Chinese decision to let the Yuan move more freely against the US$. This moving freely is all relative as it will still be very controlled but it does mean that Chinese exports will become more expensive and less competitive and make other countries exports into China cheaper. So the logic being applied is that we will see a rebalancing of the world's cash flows with China's trade surpluses reducing.

And the other beneficiaries from the Chinese reduction in currency controls are the commodity backed currencies who will see their exports to China become more competitive.

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