All posts by mporter

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.

Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for further information or for a live quote.

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.

Federal Reserve & US Dollar

Ben Bernanke, Chairman of the Federal Reserve has indicated that there will be no immediate monetary stimulus but that the Federal Reserve will consider the use of all its monetary tools at their next meeting in September.

“The Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (20th-21st September) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.” Ben Bernanke, Chairman Federal Reserve.

Currently the Pound trades lower against the US Dollar at 1.6230.

Currency Update

The Pound has slipped against the US Dollar and the Euro following comments yesterday from Bank of England Monetary Policy Committee member Martin Weale. Weale stated that the UK risked slipping back into recession and that in his opinion the Bank’s growth forecast of 2.8% and 3.2% for 2011 and 2012 may be too optimistic.

The Pound currently trades at 1.1330 against the Euro and at 1.6375 against the US Dollar. The Euro is up against the US Dollar at 1.4450.

BoE Minutes & UK unemployment data

The Pound has fallen this morning following the release of Bank of England Minutes and UK employment data. The Pound now trades back below 1.14 against the Euro and below 1.64 against the US Dollar.

The Bank of England Minutes revealed that all nine members of the Monetary Policy Committee (MPC) voted to keep interest rates unchanged at 0.5%, previously two members Martin Weale and Spencer Dale had called for a 0.25% rate hike. Adam Posen continued to be the only member who voted for an expansion of the Bank’s Asset Purchase Programme known as Quantitative Easing. Whilst Quantitative Easing remains at £200bn, some members of the MPC did consider the case for more Quantitative Easing. This softening in the Bank of England’s stance has weighed on Sterling.

Whilst data from the Office for National Statistics showed an increase in the claimant count and an increase in the UK unemployment rate from 7.7% to 7.9% further undermining confidence in the UK economy and Sterling.

BoE & ECB

The Bank of England and the European Central Bank have both left their monetary policies unchanged today at 0.50% and 1.50% respectively as growth slows and the European debt crisis spreads to Italy and Spain.

The Pound is up against the Euro trading between 1.14 – 1.15 and in the region of 1.63 against the US Dollar. The Euro currently trades at 1.42 against the US Dollar.

The Pound has also appreciated against commodity currencies, passing 1.54 against the Australian Dollar and 1.58 against the Canadian Dollar.

The exchange rates mentioned in the above email are based on the current interbank rate. Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote.

The Pound has remained stable …

The Pound has remained stable following the release of July’s Bank of England Monetary Policy Committee (MPC) minutes, trading at 1.13 against the Euro and at 1.61 against the US Dollar on the interbank market.

The minutes showed that the MPC remains split, with 7 members voting to keep interest rates unchanged at 0.50% whilst 2 members, Mr Spencer Dale and Dr Martin Weale called for a 0.25% hike. Dr Adam Posen remains the most dovish member of the MPC calling for a £50bn increase to the Bank’s £200bn Quantitative Easing Asset Purchase Programme. Most MPC members admitted that recent events had reduced the likelihood of any near term tightening to monetary policy. However, thankfully for Sterling, the majority of MPC members made no explicit reference to further Quantitative Easing.

The market will now focus on the ongoing European Sovereign debt crisis and the European Finance Ministers meeting and the continuing negotiations in the US Congress to increase the US debt ceiling.

Sterling falls following dovish Bank of England

The Pound has depreciated this morning (22/06/11) following the release of the latest minutes from the Bank of England Monetary Policy Committee (MPC). The minutes indicated that the Bank of England is less likely to raise interest rates this year, which makes Sterling less attractive to investors seeking higher yielding currencies*.  

The minutes show that out of the nine MPC members only two members voted for an interest rate hike, whilst seven members voted to keep interest rates unchanged at their record low for the 27th consecutive month. This was a change from the previous MPC meeting in May when three members had voted for a rate hike. The changing makeup of the MPC since Andrew Sentance’s departure after May’s meeting and the appointment of Ben Broadbent, who voted for a hold in June, points to a more dovish MPC. Andrew Sentance was consistently the most hawkish member of the MPC, being the first member to call for a 0.25% rate hike consistently since June 2010 and voting for a 0.50% hike at the last four meetings.

Whilst the Bank of England kept its Quantitative Easing Asset Purchase Programme on hold at £200 billion, the idea of further Quantitative Easing was floated by some members should the downside risks to inflation realise, further undermining Sterling’s value.

In the Eurozone, the Greek government won a critical vote of confidence, paving the way for the next crucial vote in which MPs will be asked to approve a €28 billion package of tax increases and spending cuts by June 28th. Laws implementing the reforms will need to be passed before the next extraordinary meeting of Eurozone finance ministers on the 3rd July in order to secure the next tranche of €12 billion of the EU and IMF’s €110 billion bailout package. It is essential for Greece to receive the €12 billion emergency loan in order to keep up with payments to her creditors totalling €340 billion. Without the €12 billion needed for Greece to make its debt repayments, Greece will likely default.

This evening the US Federal Reserve will announce its latest interest rate decision. Interest rates are expected to stay unchanged at their current level of 0-0.25%. However, tonight’s meeting also coincides with the expiry of the Federal Reserve’s current Quantitative Easing programme. The following press conference will be analysed for any suggestions of further Quantitative Easing in the future.

Currently Sterling is looking particularly vulnerable and further falls cannot be ruled out. Ongoing uncertainty surrounding the global economic recovery and the sovereign debt crisis in Europe means it is likely we will continue to see high levels of volatility in the foreign exchange market. Please do not hesitate to contact the dealing team for further information or to discuss how best to eliminate currency risk.

*Comparative World Interest Rates

Bank of Japan: 0.1%

Federal Reserve (USA): 0.25%

Swiss National Bank: 0.25%

Bank of England: 0.5%

Bank of Canada: 1%

European Central Bank: 1.25%

The Reserve Bank of Australia: 4.75%

People’s Bank of China: 6.06%

Brazil: 12.25%