Understanding Currency

The Journal of Commerce Index Forex Pip Fishing Review of Industrial Materials Prices registered a new record high yesterday - in less than two years, industrial materials prices have more than doubled. Little wonder that both China and India have an inflation problem. Soon the West will start worrying more about inflation than deflation. Trade figures offer some encouragement for sterling. Although the headline UK trade figures were slightly disappointing, a closer examination suggests a more sanguine interpretation is warranted. Excluding oil, the trade deficit narrowed by more than £0.5bn to £8.1bn in November, helped by a 4% jump in goods exports. In contrast, imports excl. oil were essentially unchanged.

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That said, the jump in oil imports in the month cannot be ignored - most of the increase in the oil deficit reflects a 42% surge in crude oil volumes. These trade numbers (at least) confirm that the exports side is registering the kind of growth suggested by recent surveys, helped by a more competitive currency. For now, however, the imports side seems to be offsetting these export gains. Some thoughts on the reluctant pound. This month, the UK has seen the biggest rise in short-term interest rates of any of the major markets, with the 2-year swap rate nearly 20bp higher than at the end of 2010. The relevance is that the 2-year interest rate spread has the greater influence on the currency, the correlation with cable being around 0.40 over the past year. That said, this relationship has broken down so far this year, with the reaction of the pound quite muted in relation to the sharp upward move in interest rate differentials.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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