WISE MONEY

Yesterday saw the world’s main central banks announce joint action to provide US Dollar liquidity, aimed at securing the funding needs of euro banks struggling to meet american funding requirements.  The money markets had been showing signs of stress, with several measures at their highest level since the financial crisis.

The loans will have three month maturities in contrast to the normal one week limit in central bank market operations so banks are given time in the run up to the end of the year to finish window dressing their results without worrying about funding issues.

The news gave a boost to the Euro against the Dollar, rising almost 2 cents in the course of the afternoon before falling back in the overnight Asian session.

The announcement was also good if you own bank shares, which clawed back recent losses especially if you bought the French lenders after their recent crashes.

More than £4 billion was wiped off UBS shares, however, as losses of $2 billion were uncovered stemming from trades put on by rogue trader in their London office.

The bank has not announced where the losses were made, but there is speculation that it could have stemmed from trades in the Swiss Franc which moved over 10 cents in a matter of minutes after the SNB announced it was pegging the currency to the Euro.

Have UBS not announced where the losses were made because of the potential embarrassment of a Swiss bank losing money as a direct result of the SNB intervention?

What the news has done is presented an open goal to all of the advocates of the ICB report on the ring fencing of retail banks from the “casino” investment banking side.

The timing was impeccable, not only was the fraud uncovered 3 years to the day of the Lehman bankruptcy, but it came in the same week as the report was published.

Chaos ensued across the markets yesterday following the SNB’s (Swiss National Bank) decision to announce they target minimum exchange rate to the Euro will be 1.20.This led to a huge switch with traders and investors alike scurrying to get funds out of Geneva and into other safe havens.

The US Dollar was the main beneficiary from all of the panic with the Greenback gaining between 1 and 2% across the board.

The announcement by the SNB caught the market by surprise and they are the first central bank to properly stand up for their currency.

Whether they actually had to use any of their own money to weaken the Franc or if it was other investors and banks, we will have to wait and see once traders test that 1.20 level for a reaction.

Sterling suffered yesterday as the rush from the Swiss Francs into the most liquid currencies led to losses against most of its rivals.

The Pound hasn’t recovered today with the release of the Manufacturing and Industrial Production numbers.

Manufacturing came out as expected at 0.1%, but the Industrial number was worse at -0.2%, yet another set of weak figures for the UK economy.

Chancellor George Osborne came out fighting insisting he will continue with plans to cut the UK Government’s annual deficit and rejected calls from Labour’s Ed Balls for another tax on the financial sector.

The Swiss franc hits record highs against the US Dollar and the euro as attempts by the Swiss National Bank prove unsuccessful in slowing the currency’s rise. The decision to expand their liquidity policy did very little to ease pressure as traders looked for more aggressive action including the pegging to the Euro or US Dollar.

Following the announcement the CHF continued to strengthen which reiterated the point additional steps will be required and currently sits at 1.3118.

In what has been a reverse of the overnight session, the Greenback continues to recover lost ground with EUR/USD back on its lows and AUD/USD down to 1.0480.

Equities are falling further led by Seoul down 2.6%, Taipei down 2.0%, Sydney and Tokyo just over 1.0%.

EUR/USD touched a fresh low overnight removing the buying interest at 1.4390.

On the face of it, there appears no reason for today’s moves but then again there was nothing apparent for the overnight moves.

Elsewhere USD/SGD has surged higher today after the MAS flooded the forward market with domestic funds. Negative interest rates are really catching on amongst the strong currencies.

Today in the UK we had retail sales at 9.30am which saw weak growth for the month of July as cash strapped consumers cut back on spending.

According to the Office for National Statistics sales volumes grew inline with the 0.2% expected figure but down from last months figure of 0.8%.

The ONS statement blamed a fall in household goods, clothing and footwear as consumer’s battle against the latest CPI figures which indicated a number of 4.4% from June’s 4.2% and well above the Bank of England’s target figure of 2%.

Sterling as a result has fallen from the highs of yesterdays 1.6570 against the US Dollar and currently sits at 1.6487 and 1.1466 against the Euro.

The Group of Seven agreed to jointly intervene in the foreign exchange markets for the first time in more than a decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake. Japan began the effort, sending the currency down the most against the dollar in more than two years.

Each of the G7 members has sold yen as their markets opened, Japan’s Finance Minister Yoshihiko Noda told reporters.

The G7 said in a joint statement after a conference call of its finance ministers and central bank chiefs that it will “provide any needed cooperation” with Japan.

Japan’s central bank repeated its pledge to pursue “powerful monetary easing” as policy makers sought to reduce the threat of the world’s third largest economy sinking into a recession.

The Nikkei 225 Stock Average gained after the announcements, paring losses to 12 percent since the quake and ensuing tsunami killed thousands and led to rolling blackouts and radiation leaks at a nuclear plant.

It is another light day on the data front- the monsters that are Greek, Chilean and Argentinian GDP figures are hardly going to move the markets.

We did have the German PPI number earlier which was announced inline with expectations at 0.7%, but still a strong number.

This has continued the euro strength trend that has dominated the markets recently and could persist if any more chat about the ECB raising their interest rates hits the wires.

The Euro has managed to claw back some of its recent losses though more on relief that Portugal got their bonds away at yesterday’s auctions than on any conviction that the Eurozone are any nearer finding a solution to its current woes. The 9 year auction itself was mildly positive with a reasonable cover ratio and the yield at 6.7%; a touch lower than the last similar offering at 6.8%.

However, these numbers were only this good on the back of recent heavy buying of Portuguese debt by the ECB and although the yield was below the perceived ‘too much to pay price’ of 7%, it is still unaffordable for a country whose economy is languishing in the doldrums.

All it does is buy Portugal and the Eurozone a little time and defers attention being transferred to Spain, where economic conditions are very similar.

Spain itself has a bond auction today and given yesterday’s result, nobody expects it not to go according to plan.

They are raising around €6 billion and interest will focus on the sort of yield demanded for the longer period offering.

Spanish 10-year bonds are currently trading at a 5.34% yield so anything above the 5.25% level will not be regarded as positive.

The whole Eurozone disparity is apparent when comparing the current economic performances of Portugal, Spain and the rest of Club Med to Germany.

Yesterday, the German annual GDP for 2010 was announced as +3.6% growth, its largest gain since the country was reunified more than 20-years ago and a remarkable bounce from the 2009 -4.7% contraction.

The euro has weakened further versus its major counterparts amid signs of division among European governments over how to stem the regions debt crisis. ECB Executive member Stark has today called on governments to take action to solve the sovereign debt crisis.

He noted that the ECB is “not in charge of fiscal policy” and that “our mandate is not to make it easier for governments to refinance their debt”.

For the euro, focus this week will be on the EU summit and whether any new mechanism to deal the sovereign debt problems is agreed upon.

The US Dollar is trading marginally higher in a relatively quiet start to the week with market participants easing into an end of year trading style.

Looking ahead, tomorrow’s FOMC policy meeting will have investors paying close attention to what the Fed has to say.

Any signs of downplaying the need for additional quantitative easing, while at the same time sounding more upbeat on the outlook for the economy, will likely open a fresh round of dollar buying.

Earlier this week we saw a squeeze higher on the US Dollar catalysed by good US retail sales numbers  but more so through the concern over Ireland tripping into dollar strength. Today the market is appeased as a bailout is inevitable- ECB and IMF officials are looking into the formalities of what will be needed for the Irish economy.

The euro has pushed higher on this realisation trading back up to 1.37 against the USD supported by middle-eastern buying.

The key question is will confidence remain in the euro arena- according to Citigroup Inc and Nomura Plc the answer will be a no.

They say that relief will be short-lived as attention turns to who is next and all fingers are pointing to Portugal.

The Portuguese Finance Minister said that while “there is a risk of contagion”, that does not mean that the country will seek financial aid- so the merry go round could start again.

On top of the bailout plans Ireland will also announce a 4 year fiscal plan to help steady the ship.

Although Dublin insists that there is no threat to Ireland’s 12.5% corporation tax, the mood over the loss of economic sovereignty was summed up by Mary Lou McDonald from Sinn Fein who stated “Officials from the EU and IMF and any other vultures circling around this country should be told to get lost”.

Tough times ahead for Ireland and there is still a possibility that sovereign issues will continue to weigh on the euro for some time to come.

Focusing on the UK, retail sales rose for the first time in three months, by 0.5% providing a much needed boost as we approach the Christmas period.

The Pound has also been lifted on the news of a bailout for Ireland- the UK is exposed to Irish debt and this led to sterling weakness earlier in the week which has now been somewhat lifted.

The G20 meeting was the non event that everyone was predicting.With any firm commitment over currency reform off the table, the best we got was an agreement to agree – nothing concrete in terms of a path forward and certainly nothing of substance to make sure we avoid a trade war further down the line.

The hope was for a commitment to restrict current account surpluses/ deficits to a percentage of GDP but surplus countries (Germany, China Etc) dug their heels in and even refused to accept such loose dialogue.

Friday’s rumour that Ireland was about to go cap in hand to the EU gathered momentum over the weekend, Irish Prime Minister Bryan Cowen denied that a bail-out was needed, but further comments this morning by Irish officials has left the door open for EU assistance.

German comments suggesting the Irish should accept the bail out to avoid further contagion in debt markets (read Portugal and Spain) spooked the markets and undoubtedly made any market based resolution even less likely.

More poor data from Rightmove continues to show deterioration in the British Housing market, but this has not affected Sterling in the majors very much in light of the larger Eurozone story.

The Bank of England minutes are released on Wednesday (not to be confused with the Quarterly Inflation report last week) showing  MPC voting preferences from the last meeting,  we also have CPI and RPI inflation data out tomorrow which no doubt show inflation still running ahead of its target level of 2% plus or minus 1%.

Finally we have jobless claims, retail sales and public sector debt levels also out this week in a busy one for Sterling.

The gap between what is promised before a G20 finance meeting and what is announced afterwards seems to be growing.The theme at this meeting was, unsurprisingly, currencies and specifically how to stop nations engaging in beggar-thy-neighbour competitive exchange rate devaluations, to keep exports cheap in the face to falling domestic demand.

This path would be disastrous for world trade and global growth in general, which need stability to allow goods, services and capital to flow freely from country to country.

What was agreed by the G20 was that the scenario above would not be allowed to happen, but the agreement stopped short of actual commitment.

The US proposed that export surpluses be capped at 4% of GDP, a sensible idea, but the current global imbalances mean that is about as likely to happen as the G20 coming up with a concrete commitment on anything.

Although it is disappointing that nothing solid was agreed, the news is generally positive and has helped stocks to gain in nearly trading and the Dollar and Euro to gain against the Pound.

The US seems satisfied that China will allow the Yuan to appreciate and it now looks unlikely that the punitive import taxes the US were threatening to slap on Chinese exports will go ahead.

Sterling has opened up the week on the back foot as continued selling pressure stemming from last weeks Public Spending Review work through the system.

The market is waiting to see if the Bank of England is seriously contemplating another round of QE and tomorrows GDP figure will probably give us a good indication of the Banks next move.

The forecast is for 0.4% on a quarterly basis but after the previous retail sales figure disappointed, we are bracing for a number showing a further weakening in growth.

A day of little action yesterday with money market’s attention being focused on the G20 meeting in South Korea. The Dollar did soften during the European trading day, but not on anything tangible – more on speculation of an impasse on the G20 discussions rather than fundamentals or economic news.

Sterling did not fare well however with continued concern over the UK economic outlook.

Buying the Greenback on an assumption that the G20 participants will be able to come to any agreement on currencies’ values or global economic rebalancing looks a very dangerous strategy and therefore I expect Euro/Dollar to ease back up into the high 1.39s before London’s close.

Remarks made by Tim Geithner, supporting a letter from the US delegation sent to the other nineteen G20 members, gave risk currencies a bit of a bid feel.

He said that G20 countries should cap their external imbalances at a particular, though unspecified, share of GDP.

It appears that the aim of any such measure would be to force export dependent economies to focus instead on stimulating domestic demand, and this should in theory reduce local objections to currency appreciation.

The US, however, are encountering strong opposition from other nations, specifically those in the Far East towards who, the accusative finger of the US Treasury tends to point.

Lack of progress at the G20 meeting will undoubtedly mean a continuation of Quantitative Easing driven markets and a longer term change of sentiment towards the Dollar would only emerge if/when US data begins to improve or it was deemed that the whole concept of QE was deemed ineffective.