Brave New World

FX Review 27/03/2009

Following another quiet session in Asia the European morning has been focused on a the worrying deterioration in the UK economy. Final GDP data released this morning shows that the UK economy shrank 1.6% y/y, worse than expected due to a huge downward revision in construction output. In separate data the household saving ratio jumped to 4.8% from 1.7%. This ties in with yesterday’s retail sales figures which show that the UK consumer, the hitherto strongest and most important support to the economy, has finally buckled and has sharply cut back in spending. Cable (GBPUSD) fell sharply this morning from 1.4497 at the start of European trading to a low of 1.4265, before recovering slightly. Overall, this week has not been kind to the UK. Worse than expected data, a failed gilt auction and questions surrounding the authority of the Prime Minister have contributed to negative sentiment that has every chance of getting worse of the course of next week’s G20 meeting.

Japan appears to be entering a new phase of contraction, with figures released earlier showing the Overall CPI falling 0.1%y/y. Retail sales fell 5.6%y/y, much higher than the consensus forecast of 4%. Deflationary pressures appear now to be everywhere. Government data out earlier this week showed that land prices have fallen for the first time in 3 years; bringing to an end to the recovery from the 1990s slump. Japanese investors are voting with their feet, witnessed in a large outflow of money towards the purchase of foreign bonds in the last week.

FURTHER UPDATE LATER THIS AFTERNOON