Risk Aversion returns, USD and JPY higher.
The market this week has seen a fresh bout of risk aversion causing stock prices and gold to tumble. As a result both the USD and JPY have appreciated considerably.
GBPUSD has fallen to its lowest levels since May 2009, falling earlier to a low of 1.5655. Some analysts now expect that the Pound will continue to slide against the USD possibly to 1.54 and from there GBPUSD could re-visit the nasty lows of 12 months ago, where GBPUSD traded between 1.3514 and 1.4986 between Jan-Feb 2009. On the other hand, if we see some more positive news we could see GBP rebound past 1.58. However, at the moment it seems that any potential upside should be limited below interbank 1.6070.
In the Eurozone we have seen renewed concerns regarding a number of member’s budget deficits. As a result EURUSD has fallen markedly, hitting a low earlier today of 1.3649. Moreover, EURUSD weakness is spilling over into other crosses and could force the Euro lower against a number of other currencies, including Sterling.
This afternoon at 13:30 we see the release of US Non-Farm payrolls, a major event on the economic calendar. If these numbers disappoint risk aversion could be strengthened further and you would expect both the USD and JPY to benefit from this.
Currency Matters can offer a number of products and strategies which help you manage your currency risk. Please contact the dealing team on +44 (0) 1695 581 669 for more information.
Sterling has continued its recent climb following yesterday’s comments from Bank of England Monetary Policy Committee member Andrew Sentance, hinting that the Bank’s programme of Quantitative Easing may be put on hold.
Later today we eagerly await the European Central Bank interest rate decision at 12:45 and press conference at 13:30.
On the interbank market Cable (GBPUSD) has pushed through 1.6230 and currently trades at 1.6265, whilst the Pound is also trading above 1.12 against the Euro. EURUSD is currently trading just below 1.45 at 1.4493.
Currency Matters can offer a number of products and strategies which can help you manage your currency risk. Please contact the dealing team for more information.
If you would like to discuss any upcoming foreign exchange requirements, please do not hesitate to contact the dealing team on 01695 581669.
The Bank of England has revealed today that it secretly lent RBS and HBOS a total of Â£62 billion in the form of Emergency Liquidity Assistance at the height of the credit crisis following the collapse of Lehman Brothers in the Autumn of 2008.
The Bank of England acts as the “lender of last resort” to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole.
The Bank of England added “In most cases, confidence can best be sustained if the Bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance.”
It is now viewed that since RBS has signed up to the government’s Asset Protection Scheme and Lloyds Banking Group which took over HBOS has embarked on an alternative strategy to raise further capital in a large rights issue “the Bank judges that there is no longer a need for the assistance to remain secret.”
In further comments to the Treasury Select Committee, Mervyn King the governor of the Bank of England has also stressed the need for the government to eliminate the structural budget deficit over the next parliament. Regarding monetary policy, Mervyn King said that over a period of two to three years the Bank of England would expect to tighten monetary policy by both hiking interest rates and selling some of the assets it had purchased under its Quantitative Easing programme. King argued that it’s hard to see how monetary policy could be more stimulatory, however noted that the Monetary Policy Committee would take any action it thought necessary to achieve the 2% inflation target in the medium term.
Taking into account a range of risks, Mervyn King currently expects that the UK economy will grow by 1.5% in 2010 and 3.0% in 2011.
King yet again took the opportunity to reiterate his support for a weak Pound, which should boost UK exports and help rebalance the UK economy.
The Bank of England is considering a reduction in the deposit rate to discourage banks from hoarding reserves. The Bank of England is of the opinion that such a move could help spread the benefits of quantitative easing to the broader economy. However, Mr King has noted that a similar move by Sweden’s Central Bank the Riksbank has only made a minimal impact.
Mr King stated that there were signs that the UK economy started to grow this quarter but the strength of the recovery is highly uncertain. He noted that the £175B policy of purchasing bonds known as quantitative easing was beginning to impact nominal spending and money supply but there is still a long way to go to get output back to previous levels, whilst risks to inflation remain on the downside.
Such comments make Sterling less attractive as global investors seek higher yields.
As mentioned previously, the future outlook for Sterling remains highly uncertain. The Pound should recover as the UK economy recovers from recession but the timing and strength of such a recovery is still unclear. With Germany, France and Japan already out of recession, confirmation that the UK economy is expanding again is vital to a recovery in Sterling. The market will also need to have some confidence that the UK will not slip back into recession, particularly as the government stimulus ends.
If Sterling interest rate differentials remain negative or even widen further then there is a risk that Sterling will remain weak for some time.