Richard Driver, Analyst Markets turned remarkably positive yesterday in light of a positive German business climate data and a successful Spanish debt auction. Global stocks rallied and dragged riskier currencies with them, leaving the dollar on the back foot in mid-week trading. The MPC minutes have been released this morning, revealing a unanimous vote in favour of holding the UK interest rate at 0.5% and leaving the Bank of England’s asset-purchasing programme (QE) unchanged at 275bn. The door was unsurprisingly left open to further QE. |
STERLING/EURO: Sterling continues to creep higher against the single currency, but ECB loan offer could help the euro in the short-term. - The ECB today will be offering three-year loans to struggling European banks in a bid to ease the liquidity squeeze that is building as a result of the debt crisis. Demand is expected to be high for the ECB’s loans and market tensions surrounding an impending credit crunch have lifted considerably in the past session.
- This morning’s MPC minutes revealed UK policymakers are firmly in wait and see mode. The Bank of England’s Broadbent yesterday reminded investors that the UK economy is in a painful period of transition, but cautiously asserted that our banks are better equipped to cope with financial shockwaves than before the financial crisis. Sterling is approaching the €1.20 mark this morning but the euro may have a stronger day in light of positivity surrounding the ECB’s liquidity commitments.
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STERLING/US DOLLAR: The US dollar is weakening off fairly aggressively in risk-positive conditions, but our preference for the greenback remains unchanged. - Sterling has climbed by almost two and a half cents from Monday’s closing price, which is a reflection of the considerable injection of risk appetite we saw yesterday. US housing data added to the positive sentiment on display yesterday, and more is likely to come this afternoon.
- We may see risk assets continue to recover today, after many sessions under pressure, which is likely to keep the US dollar on the back foot. Still, even with the ECB’s three-year loan offer, we favour the US dollar as the prime safe-haven in an uncertain start to 2012. Nonetheless, sterling is trading up towards $1.5750 this morning, which represents a one-month high and a good rate to buy the dollar.
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EURO/US DOLLAR: The euro is trading a cent and a half higher against the US dollar as Spain enjoys a positive bond auction. - Yesterday’s Spanish bond auction drew solid demand and the ECB’s loan offer is only likely to help bond yields in the eurozone, with banks more willing to buy peripheral debt. Yesterday’s strong German business climate survey also helped the euro, and a German consumer climate was also better than expected, all suggesting that the German economy could bounce back from here.
- Global equities rallied and the euro predictably tracked these gains, climbing to a much more comfortable level of 1.3150 against the US dollar. Further gains seem fairly likely as sentiment continues to improve.
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STERLING/AUSTRALIAN DOLLAR: Sterling lost considerable ground against the aussie dollar in risk-positive trading conditions. - Asian stock indices rallied last night by 1.5-2.0%, and took the aussie dollar with it. The aussie dollar rocketed back up through parity against the US dollar as a result. The ECB loan story is the key factor driving this improvement in global investor confidence and this relief rally looks to have some more legs in it yet.
- Sterling is trading down at 1.5450 against the aussie dollar, and we are likely to see the pound remain under pressure today as well.
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STERLING/NEW ZEALAND DOLLAR: The kiwi dollar made some hefty gains despite a widened NZ current account deficit. - Data last night revealed that New Zealand’s current account deficit worsened to its worst level in a year. However, as usual international developments proved far more important and the kiwi dollar joined in on the rally in riskier assets that we saw yesterday.
- Sterling is trading down below 2.03 this morning, and a bounce back may have to wait for today and perhaps even this week, but sterling should return to higher levels before long, with major concerns over the eurozone likely to resurface.
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STERLING/CANADIAN DOLLAR: Sterling erased some early gains against the loonie as US stocks rallied on positive headlines from the eurozone and the US economy. - The Canadian dollar recouped some ground as the eurozone’s short-term situation improved. Further positive signs from the US economy, this time in the form of the housing market, also added to the improved outlook for demand for Canadian exports.
- Still, this is a less volatile pair than GBP/AUD or GBP/NZD, and sterling’s losses were capped. Sterling continues to trade close to 1.61.
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