Power and Gas shortages causing concern

By Lauren Buckner

The Pound weakened by over a cent against the Euro and one and a half cents against the USD yesterday as foreign exchange markets saw a flurry of trading towards the US Dollar. The traditional ‘safe haven’ currency, the USD is often bought up during times of uncertainty to protect professional traders from adverse market movement until some more stability or clear direction is seen with exchange rates. A safe haven currency is one expected to retain it’s value in the event of a global catastrophe – one with consistent demand – and as the most globally traded currency the USD is that ‘safe bet.’  Although disappointing for those wishing to purchase EURs or USDs this has presented a good opportunity for our clients that need to purchase GBP – a reminder for many that there are always those that will benefit from market movement; fx markets do not hold any prisoners.

The reasons for the move appear to be two-fold; Chinese economic output has been hampered in recent days by a series of power shortages leading to both power cuts and the closure of many factories and a bubbling EU/UK gas crisis.

Power shortages, due to tightening emission standards and a slow down in coal supplies has seen much of Chinese production begin to slow which puts unprecedented pressure on global supply chains. With gas prices in the EU and UK having risen by over 500% in the past year and close to record highs a similar squeeze could be seen here as governments begin to warn of possible black outs and factory closures yet a further challenge. This is an issue at the ‘coal face’ for supply which is already strained.  For the UK, with issues of a lack of HGV drivers and empty shelves already appearing for many of our readers in day-to-day life and occurs much later down the supply chain. The critical issue at hand is that if the Chinese producers are unable to manufacture products, then a surge in the number of HGV drivers may have little impact; without goods to deliver more drivers is not a solution. If Chinese production continues to slow the damage to the supply chain is a global one.

For the EU/UK at least this is more likely a seasonal problem with gas prices. As winter approaches and the demand for gas increases, we hope that this will be a short-term squeeze. A lack of reserves, energy from wind turbines dropping due to calmer weather over the summer and a reduction in supply from Russia as they bolster their own reserves has given us the perfect storm. For consumers in the UK this has already impacted supply and a number of energy companies have already gone into administration.

In addition, the USD presents an attractive investment at the moment as further signals have been received that the Federal Reserve are due to taper their massive bond-buying programme as the economy continues to recover at pace from the Covid pandemic. In addition, signals from the FED board that interest rate rises could be seen as early as 2022 (previously believed to be 2023 earliest) bolsters the dollar’s value.

Further to this Brexit and a frosty relationship between Boris Johnson and French President Emmanuel Macron are back in the limelight with news overnight confirming that three quarters of applications from French fisherman to fish in UK waters have been rejected. This has led to significant anger from the French with Clement Beaune, the French Europe Minister stating, “we will not hesitate to take retaliatory action” and French fisherman threatening to prevent UK goods destined for Europe from leaving port. The UK response is that we have “bent over backwards” to be as generous as we can with the licenses and many vessels have failed to prove their historic links to fishing UK waters.

Focussing on GBP/EUR the Pound has regained some ground at the time of writing following yesterday’s fall in rates. Although movement in this pair has been rangebound since Easter we are seeing movement within a 2.5 cent range which is still significant enough to impact the cost of a property purchase overseas. On a £100,000 transfer a two and a half cent move is a difference of €2500 which should not be underestimated, currency markets are a gamble and protecting your costs should be a priority, Please keep in touch with your Account Manager to keep abreast of market developments and your upcoming transactions.