Strong buying by Asian sovereign accounts helps strengthen sterling

Published: 13 January, 2011

Sterling strengthened to near a one month high against the US dollar yesterday following strong buying by Asian sovereign accounts.

Currency rates

EURO/GBP - 1.1987

US$/GBP - 1.5733
CHF/GBP - 1.5314
CAN$/GBP - 1.5531
AUS$/GBP - 1.5827
ZAR/GBP - 10.7618
JPY/GBP - 130.689
HKD/GBP - 12.2371
NZD/GBP - 2.0600
SEK/GBP - 10.6214
US$/EURO - 1.3120

This helped offset an earlier drop caused by poor UK data. Figures released showed that the UK trade deficit widened to £8.736bn in November - £0.4bn more than expected and the highest trade deficit since records began in 1980. The data saw sterling drop marginally against the euro and US dollar but it was well supported by large purchases of sterling from Asia and Russia. Tomorrow is a busy day for data; with manufacturing production figures and the first Bank of England interest rate decision of the New Year. Policy is not expected to change, but investors will keep a close eye on the minutes of the meeting when they are released in 2 weeks time.

In the euro zone, the euro posted gains against the US dollar and sterling after a key Portuguese bond auction went slightly better than expected and news emerged that many investors believe the European Union will add further funds to the emergency bailout fund. Whilst the euro performed well, it was simply a reaction to the auction not being as bad as expected - specifically the yield that Portuguese government needs to pay on the debt, which came in at 6.7% against an expectation of above 7%. The upshot is that the crisis is by no means over. Today sees the ECB interest rate and press conference.

In the USA, the Federal Reserve's 'Beige Book' (a report on the economy based on anecdotal reports across the country) painted an increasingly upbeat but cautious picture for the US economy going into 2011. Economic activity grew moderately in November and December, and with employment picking up the US could slowly be turning around. There is unemployment claims numbers released today and trade balance figures.

Elsewhere, the Chilean government finally took the plunge and intervened in the foreign exchange markets to stem the rampant strength of the Chilean peso. The government bought large quantities of US dollars, but this had little effect as strong copper prices (Chile's major export) drove a demand for the peso and saw it strengthen 1% against the US dollar on the day.

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