Currency matters when buying property overseas

21 April 2009

The Pound endured a mixed performance last week, but made noteworthy gains particularly against the euro and US dollar. Whilst the UK remains in the midst of deep a recession, a falling pace of decline in several indicators of activity are beginning to be heralded in a growing number of quarters as signs that the worst may be over. This is akin to surmising that we are nearing the bottom of the 'V' in this cycle - or perhaps the 'U' or the 'L' depending on whose view you share as to the shape of an eventual recovery.

The Royal Institution of Chartered Surveyors report was one such indicator; although more surveyors are still seeing falling house prices than rising prices, the balance is narrowing as buyer interest picks up. So too the British Retail Consortium, which reported a fall in the pace of decline in like-for-like retail sales whilst still being 1.2% lower in the year to March. An improved banking sector earnings outlook also boosted Sterling's performance.

A busy economic calendar this week includes consumer inflation (Tuesday), BoE policy meeting minutes, budget presentation and employment data (all on Wednesday), and retail sales (Friday). The Gross Domestic Product report for the first-quarter will also be keenly awaited on Friday, and Sterling may lose some support if the third-consecutive quarterly contraction is deeper than expected.

US Dollar (USD)
Sterling last week broke past the US$1.50 level for the first time since 12th January 2009, but was unable to hold on to this level through to the end of the week. This initial advance was largely due to Sterling's strength, although it also came after a plunge in US retail sales in March. The US consumer will inevitably be important in underpinning economic activity and, whilst this was the first drop in three months, it illustrates that rising unemployment remains a deterrent to private spending.

The first annual fall in consumer price inflation since 1955 also made headlines, drawing comparison to Japan's malaise in the 1990's and contrasting with a relatively upbeat prognosis for the economy from President Obama and Federal Reserve Chairman Bernanke. The GBP/USD rate closed up 0.84% at 1.4794, from 1.4671 a week earlier, benefiting those converting Pounds into US Dollars.

US Existing Home Sales (Thursday), New Homes Sales and Durable Goods Orders (both Friday) will be closely watched this week for signs that the US economic outlook indeed appears to be improving.

Euro (EUR)
The Pound made headway against the Euro last week, particularly over the early stages of the week. However, Sterling was better able to sustain these gains against the Euro than it was against most other currencies.

Sentiment towards the Euro waned after comments from European Central Bank (ECB) President Trichet that it must do everything possible to improve confidence. The ECB has often prepared the market for future interest rate moves, and this was interpreted as a likely indication of a further cut on the 7th May. Tasked with combating inflation, the ECB may have greater scope for this (with further less conventional measures remaining a possibility) after inflation eased to 1.5% in March.

The GBP/EUR rate closed up 1.99% at 1.1342, from 1.1121 a week earlier, benefiting those converting Sterling into Euros.

Economic sentiment surveys in the Euro zone will be provided by the German ZEW index (Tuesday) and IFO indices (Friday). Leading indicators of activity will also receive attention with the Purchasing Managers Indices, assessing conditions in the manufacturing and service sectors, released on Thursday. Support for the Euro could be further undermined if the data are weaker than expected.

Canadian Dollar (CAD)
The Canadian Dollar generally lacked clear direction against the Pound last week, but made some headway over the latter part of the week to recoup earlier losses. A first rise in manufacturing sales in seven months in February boosted some optimism over the domestic economy, although continuing job losses and a fall in annual inflation suggest that the Bank of Canada is likely to keep interest rates at very low levels.

The GBP/CAD rate closed down 0.18% at 1.7946, from 1.7979 a week earlier, benefiting those converting Canadian Dollars into Sterling.

All attention this week will focus on the Bank of Canada's (BoC) interest rate decision on Tuesday. With interest rates currently at just 0.5%, the BoC is expected to announce plans to stimulate the economy via additional measures such as 'quantitative easing' (i.e. by increasing the money supply).

If so, it is the market's assessment of these that is likely to have a significant impact on the Canadian Dollar's direction.

Australian Dollar (AUD)
A Pound last bought fewer than two Australian Dollars back in October 1996, and Sterling began last week perilously close to this psychologically important level. However, Sterling recovered modestly during the first half of the week, with renewed concerns over the outlook for the global economy weighing most heavily on those currencies such as the Australian dollar, which still offer relatively high interest rates. Australian business confidence improved in March, but remains at historically depressed levels.

The GBP/AUD closed at 2.0473, up 0.46% from 2.0379 a week earlier, benefiting those converting sterling into Australian dollars.

Minutes from the Reserve Bank of Australia's 7th April interest rate policy meeting will be released on Tuesday, with the latest consumer inflation figures to follow on Wednesday. Both will be scrutinised for potential implications on the future path for Australian interest rates.

New Zealand Dollar (NZD)
The New Zealand Dollar lost ground against Sterling last week, as weaker than expected growth in China fuelled concerns that the global recession may deepen. Although retail sales unexpectedly edged higher in February, a cut in interest rates remains widely expected next week. Consumer inflation dipped to an annual rate of 3% in the first quarter of 2009 and, with further falls expected, may provide the Reserve Bank of New Zealand greater scope to reduce interest rates.

The GBP/NZD rate closed at 2.6039, up 3.54% from 2.5149 a week earlier, benefiting those converting Sterling into New Zealand Dollars.
There is little in the way of market-sensitive domestic data releases this week, with international developments such as global stockmarket and commodity price trends likely to remain key influences for the New Zealand Dollar's performance.

South African Rand (ZAR)
The case for a further interest rate cut (next decision due 30th April 2009) has been given further weight by deteriorating economic conditions. The gloomy outlook for first-quarter 2009 growth prospects follow from further slumps in manufacturing and mining production, whilst a fall in real retail sales was a greater than expected 4.5% year-on-year in February. The Rand initially weakened last week, but recovered as the week progressed.

The GBP/ZAR rate closed at 13.196, down 0.66% from 13.284 a week earlier, benefiting those converting Rand into Sterling.

There are no domestic data releases scheduled this week, with the rand's direction likely to be dominated by international developments.