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Currency update, October 1 - EU farming subsidy causes sterling to drop

Published:  01 October, 2010

Sterling fell to a 4 month low against the euro yesterday after large flows related to the annual EU farming subsidy saw investors covering short positions after a surprise jump in orders for euros into sterling.

Currency Rates
EURO/GBP - 1.152
US$/GBP - 1.574
CHF/GBP - 1.540
CAN$/GBP - 1.622
AUS$/GBP - 1.626
ZAR/GBP - 10.977
JPY/GBP - 131.40
HKD/GBP - 12.220
NZD/GBP - 2.132
US$/EURO - 1.366
HUF/GBP - 318.69

The EU subsidy saw a large amount of euros moved into sterling, which caused sterling to drop. Once that had happened, many started taking advantage of the strong euro prices to move more euros into sterling, which saw a lot of speculators (who had been betting on a swift rebound) scramble to reverse their positions and avoid losing money. All in all, the effect of this was that sterling dropped from an earlier high of €1.1675/£1 to a 4 month low of €1.1535/£1. Despite this, sterling had a strong day against the US dollar - hitting $1.5920/£1 as house prices edged higher and Adam Posen (who earlier in the week stated that there should be more Quantitative Easing) said that he had not yet decided which way he would vote at the next Bank of England meeting. This eased concerns, but consumer confidence weakened more than expected. There is further house price data out today and manufacturing data.

In the Euro zone, it was a poor day but the euro reacted counter-intuitively against sterling. Firstly, credit rating agency Moody's downgraded Spain's credit rating the day after mass 'austerity protests' that brought much of the country to a halt. Secondly, the Irish Finance Minister Brian Lenihan outlined that the final bill for bailing out and recapitalising the country's ailing banks could top €29bn which he described as "astonishing". This saw the euro slip generally against the major currencies, but this was soon reversed after data showed that banks in the region had requested less emergency funding than was available to them, which helped boost sentiment. Out today, there is unemployment data so speak to one of the team and protect your profit margins.

In the USA, following the news that Euro zone banks were relying less and less on bank funds, the US dollar dropped to a 5 month low against the euro. US dollar losses were limited though, as data showed stronger than expected business activity, lower unemployment claims and a 0.1% upward revision in 2nd Quarter GDP data.

Elsewhere, Canada's GDP contracted for the first time in over a year due to weakness in the manufacturing, construction and retail sales data. This left it highly unlikely that the Bank of Canada will look to continue its programme of interest rate hikes. Financial markets now expect interest rates to stay on hold for the remainder of the year. Have a fantastic weekend!

Smart Currency Exchange is a currency partner to Harpers Wine and Spirit. Harpers Wine and Spirit has teamed up with Smart to provide readers with a free bespoke currency service.

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