Risk Aversion

Markets have responded negatively following the Fed’s gloomy outlook for the US economy and announcement to launch limited measures designated to boost growth known as Operation Twist. Operation Twist does not inject any new money into the economy but the Fed will sell USD 400bn of short term bonds and buy USD 400bn longer term debt to lower the yield.

Risk aversion is a clear theme in today’s trading with sharp falls seen in global equities and oil trading back below $85 per barrel. Commodity currencies such as the Australian, Canadian and in particular the New Zealand dollar have weakened markedly on the negative global economic outlook. Whilst despite the negative outlook for the US economy, the US Dollar has appreciated on safe haven flows. Recent activity from the Swiss National Bank making the Swiss Franc less attractive for those seeking a safe haven.

The Pound has continued to slide against the US Dollar, trading at 1.54 on the interbank market.

Bank of England Minutes

The Pound has weakened this morning following the release of minutes from September’s Monetary Policy Committee (MPC) meeting.

All nine members of the MPC voted to keep interest rates on hold at 0.5% as widely expected. Adam Posen was the only member to continue to call for a further expansion of the Bank’s Quantitative Easing (QE) programme, voting for a further £50bn of stimulus.

Whilst only one member voted for further QE, the minutes indicated that for many of the MPC members the decision to hold QE at its current level of £200bn was finely balanced and that the case for further QE had strengthened.

As discussed in previous blogs the threat of further QE poses a significant threat to the Pounds value.

The Pound is down against the US Dollar trading at 1.56 and down against the Euro trading at 1.14.

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BoE and ECB

The Pound has appreciated against the Euro following today’s Bank of England and European Central Bank (ECB) interest rate announcements. Both Banks kept their interest rates on hold at 0.50% and 1.50% respectively.

However, in the following ECB press conference, ECB president Jean-Claude Trichet struck a more cautious tone, warning that the Euro-zone economy will grow more slowly than previously expected and that the risks to medium-term inflation had moderated.

Whilst stopping short of hinting at rate cuts in the short term, it is now more likely that we could see an interest rate cut from the ECB within the next 12 months. If the current interest rate differential narrows between the UK and the Euro-zone the Pound should gain against the Euro.

The Bank of England Monetary Policy Committee (MPC) does not hold a press conference following their announcement so the market will eagerly await the release of the MPC minutes on the 21st of September and the Bank of England Quarterly Inflation Report on the 16th November. The possible threat of further Quantitative Easing still poses a significant threat to the Pounds value.

The Euro has depreciated against both the US Dollar and Pound hitting a low earlier of 1.3945 and 0.8705 (1.1487) before recovering modestly.  Elsewhere, the Pound continues to trade either side of 1.60 against the US Dollar.

Swiss National Bank sets minimum exchange rate at CHF 1.20 per Euro

The Swiss National Bank (SNB) has intervened in the market this morning announcing that they will set a floor to the value of the Swiss Franc (CHF) against the Euro at EURCHF 1.20.

SNB Statement

‘The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.’

http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf

 

On the interbank market EURCHF has appreciated from 1.10 to above 1.20. GBPCHF has appreciated past 1.36, whilst USDCHF trades above 0.84.

Elsewhere, EURUSD trades between 1.41-1.42, EURGBP trades at 0.88 (GBPEUR 1.1364) and GBPUSD trades at 1.61.