The Irish Central Bank has said it will need to increase the amount of support to the country’s banking sector.It said supporting Anglo Irish Bank would cost from 29.3bn euros to a “stress scenario” bail-out of up to 34bn euros -£29.2bn. Only last month the cost of the bail-out of Anglo Irish was estimated at between 22-25bn euros.

The cost would push the Irish Republic’s fiscal deficit from 12% to a massive 32% of gross domestic product (GDP).

By comparison- including the cost of its bank support, the UK’s deficit is around 10% of GDP for this year.

The Irish Republic says its latest announcement represents the final costs of repairing the country’s banking system. It hopes this will reassure worried investors.

The Irish Finance Minister, Brian Lenihan, has announced what he hopes will be a comprehensive and final rescue scheme for Ireland’s banks, whose reckless lending has mortgaged the entire Irish economy. ”

The central bank also said it would also increase support to Allied Irish Bank, which would need 3bn euros before the end of the year.

The Irish Republic is viewed as one of the weakest economies in the eurozone, despite it taking tough action to regain control of its economy.

The extra support for the banking system has led Mr Lenihan to say he will cut another 3bn euros from spending in the budget later this year, a move designed to help shrink the deficit to 3% of GDP by 2014 to keep within eurozone rules.

This week, mounting concern over the Irish economy sent its cost of borrowing on the open markets to a record level.

The latest GDP figures showed the Irish economy contracted by 1.2% for the second quarter. Greece’s GDP dropped by 1.5% in the same period.

Mr Lenihan said the country would cancel its bond auctions in October and November and would not return to the bond markets until early in 2011.

The Irish government has previously rejected speculation that it could have difficulty raising funds and might have to seek help from a huge EU rescue fund set up after the Greek debt crisis earlier this year.

The interest rate on Irish government debt due on 10 year bonds reached a record 6.791% on Wednesday.

The Dollar has received a boost after an article in the Wall St Journal, in which it discussed the method that the FED might use for any proposed QE2 measures. In a nutshell, it said “rather than announcing a programme of massive bond purchases with a finite end, as they did in 2009 in attempt to shock the U.S. financial system back to life, Federal Reserve officials are weighing a more open-ended, smaller-scale programme that they could tinker with as the recovery unfolds”.

While noting that “The Fed hasn’t yet decided to step up its bond purchases, let alone agree on an approach”, the article will no doubt go a long way to confirming expectations that both QE2 is coming and the probable form in which it will be seen.

More market relevant data ought to emerge from the US later with the Case-Shiller housing index, consumer confidence info and the Richmond Fed manufacturing index for September.

There is a chance that all three will disappoint and a weak batch of data will only serve to underline the strong chances for additional QE being announced at or prior to the next FOMC meeting at the beginning of November.

The latest GDP figures for the UK were released this morning showing a rise of 1.2% QoQ for the 2nd month in succession leading to a strong start for Sterling against its rivals. The leading indicator of economic health also illustrated an increase of 1.7% YoY painting the picture that the UK economy is steadying and looking at sluggish, but stable growth.

The news has kept the Pound above 1.58 against the Dollar, but also seen it bounce back over 1.18 in trading vs the Euro.

This has also been on the back of comments from the IMF and the Bank of England.

Firstly, the International Monetary Fund endorsed Chancellor George Osborne’s deficit reduction plans stating that the UK was “on the mend” and added the plan “greatly reduces the risk off a loss of confidence in public finances and supports a balanced recovery”.

Secondly, BoE Deputy Governor Charlie Bean said the central bank wanted households to “spend more rather than save”.

The Euro has taken a small hit this morning as Moody’s announced it was slashing the ratings of Anglo Irish’s debt, unnerving investors as Dublin tots up the final cost of rescuing the lender whose loans have crippled the Irish economy.

Government bond spreads between Germany and the struggling nations of Europe have widened again leading to more fears over the Eurozone debt situation.

Eurodollar is down a cent, which will bring relief to all exporters to the US as the pairing runs up against stronger resistance; it has been sitting on 5 month highs.

Today marks the start of a busy week in the wise money markets. A large amount of important data releases are scheduled for release this week and several prominent central bankers are due to speak.

This is set against the backdrop of further intervention by Japanese authorities, aimed at curbing Yen strength and further grumblings by the US of China’s refusal to let the Yuan appreciate to fair levels against the Dollar.

The Greenback is yet to recover from last week’s FED meeting and continues to struggle across the board, this afternoon the Chicago Fed National Activity Index will probably show a further slowdown in economic activity so expect the Euro and Sterling to cling stubbornly onto the gains from last week until tomorrow.

Later in the week US GDP is announced, with forecasts of a slight increase from 1.6 to 1.8 per cent. The Fed & markets will be following the figures intently, as disappointing figures may mark the start of the “exceptional measures” the Fed mentioned in the last meeting.

UK GDP figures are released on Tuesday; again the number is very important to the future path of Sterling, with positive growth vital in the face of the steep government spending cuts just over the horizon.

The fear among some economists is the announced cuts reduce growth below the levels needed to service existing debt payments and we enter into a death spiral of further cuts and further reductions in growth, leading to further cuts.

The UK housing market also showed further signs of slowing, all Britain’s regions showed monthly price declines in the Hometrack Housing Survey.

The big question economists are asking is how long the recent Euro strength / Dollar weakness will last?The price action topped at 1.3438 yesterday despite weaker Eurozone data in the form of Eurozone PMI. The rate held above 1.3335 which, coincidentally was the exact level we were at in August before the Euro decided to move south and dip to 1.2600.

Today is a quiet day in terms of data and the current level could make the German IFO release this morning very interesting.

Once again, the potential difficulty is the future expectation component and if, as seems likely, the position for the German economy remains ominous, coupled with the concerns over Eurozone sovereign debt issuance requirements, the present value of the Euro may demonstrate a little over reaction.

However, numbers in line should see Euro/$ have another quick sniff at 1.3400.

The Far East session was again destroyed by holidays but what promised to be a ordinary trading period was enlivened by a swift leap in USD/YEN from 84.50 to 85.30 in the matter of half an hour. State intervention perhaps?

No comment was the official response (which would be surprising if the BoJ had been involved ie why try and push the rate and then deny it?) and so the market spent the next couple of hours allowing the cross to ease back to the 84.60 level.

Commodities remain strong, with Gold the headliner.

This continues to wend its way higher but other less high profile assets are also making waves.

Silver is now at a 30-year high, again with further to go, and the entire commodity scenario argues for continued gains in the Aussie and Canadian currencies.

Wise Money wishes you a good weekend!

The FOMC decision and statement from Tuesday evening was still the catalyst of movements in all of the markets yesterday, as Asian and European investors had the opportunity to react to the news. Further US Data also showed that home prices dropped 3.3 percent in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.

Prices fell 0.5 percent from June vs. a market expectation for only a 0.2% decline, the Federal Housing Finance Agency in Washington said yesterday.

The time it would take to clear the market of homes for sale also hit a 10 year high of 12.5 months.

Over on this side pond, the minutes of the most recent Bank of England meeting, released yesterday, signalled that it’s moving closer to more asset purchases, joining the Federal Reserve in contemplating further stimulus to revive a flagging economic recovery.

That may put both the expansion of the central bank’s 200 billion Pound government bond holdings and buying other securities on U.K. officials’ agenda.

Policy maker Adam Posen last week argued that a “plan B” approach for the Bank of England should be “heavy-duty credit easing.” The Confederation of British Industry also cut its gross domestic product forecast for next year.

The Federal Reserve meeting yesterday evening did not throw up any surprises, but the Fed signalled a more sluggish outlook for the US economy and reiterated its willingness to take additional measures to boost the economy. There was no mention of concrete action as yet, which given the fact that we are rapidly approaching US mid-term elections, is sensible but the change in tone from “wait and see” to “we stand ready to act” was enough to reverse all of the Dollars recent gains in a broad sell off of the Greenback overnight.

Over the next few days we will see if the market is correctly pricing another bout of QE in the near term or if this move will be shrugged off quickly since central bank threats of action has been spectacularly unsuccessful over the past few months.

The Dollar sell off also brings the Japanese FX intervention back into focus, as the USD JPY pair moves back towards levels where intervention initially occurred.

Prime Minister Kan has been quoted as saying the intervention in the FX markets in not yet over, so the fear is fast becoming a beggar-thy-neighbour competitive devaluation as central banks scramble to keep exchange rates low in the hope of stimulating the faltering economic recovery.

The only problem is that not everyone can do it at the same time, and we can expect emerging markets and the commodity producing nations (since it will be these currencies that will strengthen as others devalue) to be none to happy about the prospect of significantly reduced competitiveness in world markets.

The Euro is benefiting from the USD weakness, although the Irish and Spanish bond auctions were broadly successful (the only issue was the high interest rate the market extracted for buying the Irish debt) it is Dollar weakness that is the main driver and we have moved past 1.33 in the EURUSD pair and under the 1.18 level in GBPEUR.

Following recent ripples on the surface of the eurozone sovereign bond yield pool the market will be able to witness first hand just how much the cost of borrowing has increased for the region’s peripheral countries with auctions from Ireland today and Portugal tomorrow.
The spread between the yields on German bonds and the rest has been widening this week therefore the results from Ireland’s efforts to sell up to Euro 1.5 billion in 4 and 8-year bonds and those from the more beleaguered Portugal, looking to raise about Euro 1 billion, might well set the trend for the Euro for the coming weeks.

The higher cost of funds for all but the mighty few will intensify pressure on government finances, weaken bank balance sheets, generally tighten credit conditions and overall increase the risk of a deeper recession in Europe. This leaves the Euro itself mightily vulnerable, with certain currency analysts targeting 1.20 versus the Dollar by the year end.

Watch out for both the levels of demand and the yields as a sign of investor appetite.

Over the pond, the FOMC will more than likely disappoint traders looking for something a bit different.

Wise Money expects, as does the rest of the universe, no change in rates or liquidity addition measures and doubt that there will be any tangible change in the accompanying statement.

The Federal Reserve will probably retain the ‘extended period’ language and is unlikely to signal any proposed change to their reinvestment programme.

With respect to the outlook, the Fed may indicate that the pace of recovery in the near-term is likely to remain modest and as for prices, following last week’s benign core CPI reading, analysts do not expect any meaningful changes to the Fed’s stated expectations for inflation to be “subdued for some time.”

In other words no alteration to policy for yet another month.

The dollar has fallen towards a five week low against the euro before a report today that may show that the U.S. housing market remains weak, adding to evidence that the world’s largest economy is slowing.The U.S. currency weakened versus 12 of its 16 major counterparts on speculation that the Federal Reserve’s Open Market Committee will also confirm that it is considering further measures to keep borrowing costs low at their meeting tomorrow.

In the U.K, data released this morning has revealed that home sellers lowered asking prices for a third month in September, wiping out half of the gains made since the start of 2010.

Average asking prices in England and Wales fell 1.1 percent from the previous month and 3.4 percent over the last three months according to Rightmove, the operator of Britain’s biggest property website. A pickup in the supply of homes for sale is putting downward pressure on prices, while curbs on lending by banks are crimping demand.

Bank of England Governor Mervyn King noted last week that bank balance sheets “are not in tremendously robust shape,” and that this may continue to restrain lending.

The Australian dollar has increased towards a two-year high after central bank Governor Glenn Stevens signalled earlier this morning that policy makers may need to resume raising interest rates should a mining boom stoke the economy next year and boost inflation.

The currency has gained 6 percent so far this month as traders increased their assessment of the chances that the Reserve Bank of Australia will increase their benchmark rate on 5th October to 29 per cent.

Over the past 10 years, the deliberate undervaluation of the Yuan by Chinese authorities has always been the elephant in the room in foreign exchange forex markets. The Chinese economic juggernaut has been powered by exports of manufactured goods to the west made cheap by very low input costs.

Quite rightly, China has been labelled the workshop of the world, and 8% average growth over the past thirty years has turned the underdeveloped middle kingdom to an economic powerhouse & the second largest economy in the world, behind the US.

America has long known China would overtake them eventually as the largest economy in the world, but they feel the Yuan undervaluation is giving the Chinese an unfair advantage.

The cheap currency encourages Chinese exports and promotes outsourcing of jobs from the US to China, which in a time of sluggish economic growth and stubbornly high unemployment in the US, automatically makes it political hot potato.

Treasury Secretary Tim Geithner’s comments yesterday that the US would use “all the tools we have” to reverse the bloated trade deficit with China, including WTO rules on fair trade, should come as no surprise in content, only in strength, given the usual soft tone used in diplomatic circles.

His comments come on the back of direct Japanese intervention earlier in the week aimed a curbing the strength on the Yen, and raises the prospect of a triangular trade dispute between the three largest economies in the world.

Sterling was, quite frankly, all over the place yesterday. Disappointing retail sales figures pushed the pound quickly lower in early trading, but as seems to be the way just now, we shook the negative news off quickly and resumed the march towards 1.57 against the USD.

Improvements in risk sentiment has aided Sterling’s move, as has improving economic data in Europe and the successful Spanish bond auction yesterday. The Euro has been driven higher against the Dollar, lifting Sterling versus the USD as well and we now trade over 1.31 in EURUSD and 1.57 in GBPUSD.