Sterling sinks below 1.50 again

The consolidation period for Sterling did not last long with overnight Asian trading and so far this morning it has been under selling pressure again. 

The reason for the fall today has again been attributed to narrowing polls showing that Labour and conservatives are "neck and neck". 

In addition credit rating agency Fitch has stated that the UK sovereign credit profile has deteriorated and Moody’s has warned that some UK banks could face downgrades. 

To top it off we have received poor economic data with UK RICS house price balance coming in weaker than expected and the UK January trade balance was also weaker than anticipated.

Elsewhere the euro has come under some pressure too against the USD and the JPY. 

Although the Greece situation is becoming yesterday's news, there are a number of other economies to replace Greece such as Portugal and Italy for starters. Expect the euro to remain under pressure for the foreseeable future.

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Euro interest rates held at 1pc by ECB

As expected the ECB kept homes loans rates on hold at 1%. 

They announced that it will continue to scale back their special lending measures as expected and equally as expected Trichet dodged the difficult bullets concerning Greece and gave little away. 

Yesterday's Greek bond issue was a real success and this gave the markets a boost backing up the recent austerity measures introduced- the market is aware that we are not out of the woods but this certainly helps. 

Expect further wranglings with Greece but nice to get some good news for a change; today the German and Greek heads are meeting. 

Should be a spicy meeting after yesterdays comment from the German Economics Minister who said that the German government has no intention of offering Greece "even one cent" and that each country has to take care of its own affairs…..would be nice to be a fly on the wall for this meeting.

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Sterling holds steady for now

Not much movement overall by Sterling as the markets paused on selling the Pound. 

This morning we have in fact made some gains back and as we stand we are holding just above the key 1.10 level and 1.50 on GB Pound/US Dollar The 1.50 level on GBP/USD is a crucial level to hold above and will help to steady the ship and prevent further selling pressure. 

This morning we have seen UK PMI data come in much stronger than expected rising to 58.40 compared to the 55 expected and giving the best reading for over 3 years. 

On top of this consumer confidence rose to 80 and a 2 year high as consumers look ahead to a brighter 2010 for the UK economy. The good data this morning was a huge breath of fresh air for sterling giving it a welcome break from the selling momentum.

EUR/USD has picked up this morning beyond 1.36 following the leaked news of an austerity package for Greece totalling 4.8 billion euros. 

There is still uncertainty on the level of support that Greece will receive from the EU and the Greek PM tactically said that the cabinet may turn to the IMF if the EU does not give support. Nice move. If we get further clarity on the level of EU support then this should lift the euro further. 

In addition it will help lead to selling pressure on USD and the JPY and hopefully boost the Pound as confidence improves.

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Pound is pummelled in currency markets

A disastrous start for the Pound in the currency markets continues the bearish trend witnessed last week. 

The pound has dropped to a near 3 month low against the euro, a 10 month low against the US Dollar and a near year low against the JP Yen. 

The UK is under heavy selling pressure with unwanted attention and unease with the fiscal deficit combined with further indications that the general election will result in a hung parliament. 

A hung parliament would severely limit the ability of a divided parliament to act decisively on the UK’s deficit spelling danger for sterling. 

In addition to this the potential purchase of the Asian life insurance unit of AIG from Prudential is causing large negative M&A flows out of sterling and into the USD.  So all in all not a bright picture for the pound which is looking alarmingly fragile and dropping sharply.

The Greece situation is still ongoing- a few rumblings of solutions have dissolved into nothing leaving the markets still uncertain and leaning to the safe havens of the USD, JPY and AUD performing well on the hint of another rate rise.

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Markets slide as Greece scares investors

Stock markets fell yesterday as fear of contagion from Greece’s debt disaster combined with depressing US economic data to send share prices down.
The FTSE 100 slid 1.2 per cent to close down by 64.70 points at 5,278.22 amid fears that Greece’s problems could derail the already-fragile economic recovery. The CAC 40 in Paris fell even further, down 2 per cent, while Germany’s DAX was off more than 1.5 per cent.
Standard & Poor's warned on Wednesday night that it may slash Greece’s credit rating to close to junk within a month, despite new austerity measures designed to cut the country’s budget deficit.
The European Commission’s decision yesterday to revise down growth forecasts for Britain alone did nothing to calm shareholders’ nerves. The commission said that UK gross domestic product (GDP) was likely to increase by 0.6 per cent this year, rather than 0.9 per cent. 

 

However, prospects for the rest of Europe were not much brighter. The forecasts showed that economic growth across the Continent would be uncertain and dwarfed by emerging Asian rivals this year.
America’s main stock markets lost well over 1 per cent in early trading, with the Dow Jones industrial average shedding almost 174 points before recovering to close down 0.51 per cent at 10,321.03.
The US Labor Department’s tally of new claims for unemployment benefits also depressed investor sentiment. It said that new dole claims rose by 22,000 to a seasonally adjusted 496,000 people in the week to February 20. Economists had expected claims to fall to 455,000.
In his second day of testimony to a congressional committee, Ben Bernanke, the chairman of the Federal Reserve, cautioned against “over-interpreting” the jobs data, which he said may have been skewed by a backlog of claims caused by recent winter storms.
Mr Bernanke also said that the Fed was investigating the role played by Goldman Sachs and other Wall Street companies in Greece’s debt dilemma. 

 

American banks entered into currency swaps with Greece almost ten years ago that allowed the country to postpone recognising its debt.
“Using these instruments in a way that potentially destabilises a company or a country is counterproductive,” the Fed chairman said. “We’ll certainly be evaluating what we learn from the activities of the holding companies that we supervise here.”

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 

Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 

This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.

The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 

Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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US consumer confidence remains fragile

Yesterdays US consumer confidence data came in weaker than expected and highlights the delicate recovery phase for the US economy. 

This also backs up recent dovish comments from the Fed asserting that interest rates will need to remain low for a prolonged period and that liquidity withdrawal may not be a foregone conclusion. The data helped to spook the markets and strengthened the natural safe havens of the JPY and USD. 

The Yen was also lifted on good export data pushing GBP/JPY back below 140.00 and USD/JPY down to 90.00. 

At the moment for recovery we have an east and west divide with robust recovery coming from China, Malaysia, Honk Kong contrasting the jitters in Europe, the UK and the US. The tide has shifted.

The Greece debacle is still ongoing and Fitch downgraded the 4 largest banks to BBB with a negative outlook to boot. The situation was not helped by a German lawmaker of the ruling conservative party commenting that Germany must ensure that it does not pay for Greece as it could trigger the demand for more aid. 

In addition the Czech finance minister said that the Greek pledge to cut the deficit to 3% in 3 years is "nonsense" in his view. 

So some lively times ahead.

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Inflation figures create another letter from Mervyn King

UK CPI inflation rate came in at 3.1% against the expectation of 3.2% so slightly lower than expected. 

However the year on year rate is +3.5% and will require a letter of explanation from Mervyn King to Alistair Darling to explain why. King has regularly banged the drum that inflation will come down as we move through 2010 and today’s data to a small extent justifies his forecasts. 

However the data did not move the FX markets which have been quiet today considering the amount of market feedback. What the data does assist with is the BoE continuing with their policy of low interest rates and leaving the door open for further QE if deemed necessary.

Today European finance ministers are meeting again concerning Greece- feedback so far again is largely talk with no real details of the fundamentals of how assistance will be delivered. 

The ongoing situation is leaving the markets flat as risk is held off the table until further clarity is divulged. We have seen a further expansion in the credit default rates today for Greece reflecting the lack of clarity.

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Volatility is the name of the day

A good start for Sterling quickly turned sour as fear once again gripped the markets by the throat. 

A lack of action points on the Greece situation certainly did not help matters, however other factors also conspired to turn the markets away from risk. 

A big factor was the decision from the Chinese central bank (PBOC) that it was once again raising its reserve requirements by another 50 basis points. The decision to do this is to cool the rapid pace of credit growth in China which is unsustainable.

The monetary tightening will hurt global growth sentiment as China is the key driver for global recovery; in particular Australia will suffer. 

The news led to a sell off in the AUD, GBP and the EUR; the negative vibes were not helped by weak Eurozone data this morning with GDP coming in at a lame 0.1% against the expectation of 0.4% and a decline of -1.7% for Industrial Production.

Given the mood in the markets we can expect to see more selling pressure on EUR/USD and GBP/USD…later today we have US retail sales- a +0.4% is expected and a good number is need to help lift the cheer in the markets. 

EUR/USD at 1.35 is a key level to watch out for and if broke should enforce further downside momentum. Sterling has benefited on the weakness in the euro pushing beyond 1.15 again.

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Greece- is there a deal or not?

EU leaders are meeting today in an attempt to lay the foundations for a deal to rescue Greece. 

Lots of speculation already touted this morning. There has been talk of IMF assistance and then IMF involvement without funding. Germany and France are widely expected to shoulder most of the responsibility in supporting Greece. 

The most recent feedback is that aid for Greece will depend on Athens meeting its deficit reduction targets this year- begs the question- what if they do not? 

Lots of fence sitting which is still leaning to reduced confidence in the markets and associated strength of the safe haven currencies such as the USD and the YEN. Expect more volatility as more news and feedback filters through.

Sterling is suffering from a hangover today after a little too much of Mervyn King yesterday. 

The Bank of England governor killed off the rally in sterling by leaving the door open for a further expansion of the QE programme. However it was not all doom and gloom from King who dismissed fears that the UK would lose their AAA credit status. 

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Euro bashing rests for porfit taking

However the pause in its recent decline is more to do with profit taking than a reversal of the currency’s fortunes. 

Today's Financial Times suggests that £7 billion of short trades are weighing against the eurozone's immediate currency prospects.


We did see both Euro and Sterling hit 8 month lows overnight as the Asian markets rushed to buy the perceived safe haven US Dollar but once again, proximity to support levels was enough to bounce both rates as Europe entered the fray. 

The concern for Euro bulls is that recovery attempts seem very limited in scope and small in magnitude. 

The rally for the single currency in the US last night was snuffed out by the combination of a late sell off in equities and an expectation that Bernanke’s testimony this evening could very well signal a more hawkish Federal Reserve outlook, with speculation that he might lay groundwork for a tightening of monetary policy.

Yesterday’s markets, outside the late US fluctuations, were largely extremely boring with traders waiting for developments (either good or bad) on the Eurozone Sovereign issue. 

Nothing much happened. The Spanish Finance minister was in London talking to bond holders and the Portuguese and Greek governments were both vocal in their defence of their respective fiscal positions Data again is light today with UK trades and US wholesale inventories the highlights. 

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Fear grips the markets

Volatility in the money markets over the last 24 hours has been staggering! 

The main economic events yesterday were related to the UK and European central bank decisions- however this was not the driver for the volatility.

The exact location of the fear was GPS…Greece, Portugal and Spain. 

There was a scramble for safer shores in the USD and the YEN and out of the euro and higher yielders and to some extent the pound as panic swept the markets. 

Escalating debt concerns are increasing in these European economies and this drove stocks and commodities lower- debts spreads between the good eggs and bad eggs widened considerably and could increase further.

The market clearly needs some reassurance in regards to the bad economic apples of Europe and ECB president Trichet did little to reassure the markets yesterday so we await a viable plan from each economy.

It seems the simmering problems perceived for some time within Europe are finally coming to the boil and the question is can each economy sort out their own mess? 

You could also throw Ireland into the equation to formulate the PIGS of Europe- if they cannot reduce their debt- will the ECB and IMF offer a trough for aid? 

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Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 

First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 

There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Currency markets future directions

US Dollar and Sterling should continue to improve against the Euro and Yen for the short term at least.

With the presumption being that the improvement in performance for both economies can be traced back to their recently acquired, more competitive exchange rates. 

Large moves in the next day or so, do look limited however, given the upcoming monetary meeting in Europe and the UK and given that much of the Euro’s recent weakness has been as a direct result of negative news from Greece. 

It has to be assumed that most, if not all, the bad news has been priced in by markets now and the currency might be set for a bit of a lift as it benefits from an increase in risk appetite. 

The Euro itself looks unlikely to surge however, given the likelihood of IMF intervention in Greece’s affairs and for those precious metal aficionados out there, it is worth noting that at present, Greece holds over 71% of its foreign reserves in gold, which at the end of December stood at just shy of $4 billion. Watch the gold price after the IMF have been in …..

Overnight the Reserve Bank of Australia surprised all but a few by leaving their official interest rates at 3.75 % against the expectation of a 0.25% increase, citing the lack of credible information so far on the effects of the previous increases, thus judging it appropriate to hold rates steady for the time being. 

The Aus$ dropped sharply on the release but stabilised on a later caveat from the RBA that if the economy continued to improve, as has been witnessed over the recent period, rates would need to be raised further. The currency held at around 88 cents versus the US$ but given the anticipated continued demand from China for global commodities.

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Greece denies a bail out is required

Greece's Prime Minister George Papandreou has denied speculation that it will have to be bailed out by the European Union.

Reports have suggested that the EU will pump money to help Greece whose public finances are in ruins.
At the World Economic Forum in Davos, he also said countries like his "are being used as the weak link, if you like, of the eurozone."
European leaders also denied that Greece would be kicked out of the euro.
"Nobody's going to be leaving the euro," Spain's Prime Minister Jose Luis Rodriguez Zapatero said.
"On the contrary, countries will be joining the euro in the future. The same is true for the EU. That is the best proof on how the EU has helped to guarantee stability."
A report in Le Monde suggested that the EU was considering bailing out Greece because the Hellenic nation's woes had shaken the euro.
'Speculation'
European Central Bank President Jean-Claude Trichet said the pact had helped keep the 16 members of the eurozone from experiencing even more strain.
Mr Papandreou said that there had been a lot of "speculation" during the financial crisis and that people were against the euro had targeted countries like his in the bloc.
Greece's public debt stands at about 300bn euros ($419bn, £259bn).
He also denied a Financial Times report that said Greece had been asking China to buy up to 25bn euros of its debt to help secure its finances.
But Mr Papandreou refused to blame the EU for the country's troubles.
"We Greeks see it as our problem to put our house in order," he said. "Greece blames itself, not the EU."
Mr Papandreou also floated the idea of having EU government bonds for all the members in the bloc.
The crisis is seen as the first test since the euro was created in 1999.
Greece, Spain, Portugal, Ireland and especially Italy together account for 40% of the eurozone's debt.
Their debt has ballooned as their countries have been battered by the financial crisis, while larger economies have had to spend huge amounts to bail out their key industries.
Since the financial crisis last year, many countries - including the UK, France and Germany - have risen above the EU's limits on public spending as a proportion of growth.
The EU's Stability and Growth Pact states that no nation in the bloc should have an annual budget deficit higher than 3% of its gross domestic product.
Greece aims to shrink public debt to 9.1% of overall economic output this year, down from 12.7% last year.

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Greeks bonds tragedy in the making

The “Greek tragedy” continues with rumours swirling that the Greeks  have approached China looking to offload €25 billion of their debt. 

The European dream is starting to crumble when on the back of the warning from the ECB that the Greeks will have to sort out their own finances they look instead to the East for a solution.

The euro has again tumbled on the back of this and €1.40 is now the line in the sand. The spread of the 10-year Greek bond yield over benchmark German Bunds also hit a high not seen since Greece adopted the euro in 2001

The US Dollar moved higher yesterday evening after the Fed's monetary policy meeting ended. 

As expected, the central bank left interest rates on hold at the historically low range of 0 – 0.25%, and has been worded in previous statements indicated that it will continue to do so for an “extended period". 

However, it was noted that one member of the committee, Thomas Hoening, voted to eliminate the extended period phrase. It also confirmed the continued plan to unwind its support to financial and credit markets. 

Also of note was its presentation of a brighter economic outlook for the economy than highlighted in its previous statement in December.

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Euro plunges to 1.40 against US Dollar

It is fair to say that the euro has been well and truly hammered over the last few trading days and is on the ropes. 

The 1.40 level on EUR/USD is today in sight which is a 7% fall from the December highs. 

The demise of the euro was triggered with the economic Greek tragedy and has since been hit with a return to risk aversion which is triggering buying of USD and JPY. 

Concerns are increasing on the maintainability of the ever expanding growth in China and fears that China will act further to slow the rampant growth by raising rates. 

This has taken a lot of risk off the table in the Far East and Australasia and we have seen weakening of the commodity currencies to tie in with this- in particular the Aussie dollar. 

GBP/EUR is hovering around the 1.15 level- a further fall in EUR/USD would lead it cleanly through the 1.15 level. The euro will not be helped by slightly weaker than expected Eurozone PMI this morning.

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Sterling strengthens to 1.15 against the euro

Sterling is continuing its rally against the weak euro but has fallen back against other major currencies. 

GBP/EUR is pushing up and has already hit the key 1.15 level in trading today as the euro is pummeled against the major currencies. The move higher for sterling is more related to euro weakness this morning as risk aversion is back in play on further concerns surrounding Greece. 

The failing on the sterling Bull Run against the USD was fuelled by renewed concerns raised by Fitch the credit rating agency on the UK’s fiscal deficit coupled with a blunt warning from Mervyn King on the health of the UK economy. 

Alistair Darling again repeated the need to cut the deficit but the rating agencies are focusing on changes introduced and not to be introduced- the general feeling is that the pre-budget has not gone far enough.

Focusing on UK data we have seen jobless claims come in better than expected and the official unemployment rate has fallen to 7.8% from 7.9%- very good news. 

No surprises from the BoE in their minutes as the MPC voted to keep rates and QE on hold with a 9-0 decision. They also indicated that yesterdays surge in CPI is most likely a blip and CPI levels should wind lower in 2010 and the February inflation report will offer more clues on the real status of inflation. 

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Sterling continues to stride ahead in 2010

Another bright start for Sterling which continues it's gains. 

Sterling hit a 6 month high against the euro and pushed higher against the USD. The move was initiated with the acceptance and recommendation from the board of Cadbury’s on the offer by Kraft. 

The Kraft offer values each Cadbury’s share at 840p and shareholders will be entitled to receive 10p per share in the form of a special dividend. Sterling gained on the back of the expected benefits from the M&A flows of the deal. 

Then at 9:30 official UK inflation data came in much better than expected- UK December CPI has come in at +0.6% month on month, +2.9% year on year, demonstrably stronger than median forecasts of +0.3%, +2.6% respectively. 

This has raised the prospects for a Bank of England interest rate rise in 2010 and it certainly offers the Bank of England something to think about in early Feb.

This data also heightens the view on the UK employment data later this week- better data here could reinforce the view that the UK is firmly on the road to recovery. 

The Pound hit a high of 1.1455 against the euro and 1.6457 against the USD before falling back from the highs- Mervyn King is due to speak later and the market will expect a cautious approach which could take the edge off sterling- we will see later..

The Euro is under pressure this morning as the fallout in Greece continues to undermine the single currency and in addition the German ZEW came in weaker than expected for the third month in a row. The euro is closing in on key technical levels against the USD and the EUR with EUR/USD close to breaking below 1.4275 and GBP/EUR targeting 1.15. 

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