Richard Driver, Analyst
There was huge demand for the ECB’s cheap three-year loans to European banks -the almost €500bn figure was double what was widely anticipated. The euro rallied briefly, until the market came to its sense and concluded a greater need to take loans is hardly confidence-inspiring. The euro subsequently came under a great deal of pressure. Today’s session brings some UK current account data, the final quarterly GDP figures from the UK and the US, which are not expected to be revised. These figures are unlikely to trigger much volatility, and safe-haven currencies will probably be preferred. |
STERLING/EURO: Sterling made the move above the psychological €1.20 level yesterday as market fails to see bright side of ECB lending.
- The ECB’s €489bn tender to Europe’s banks has failed to trigger a euro rally. There is scepticism as to whether European banks will use the additional funds to purchase Italian and Spanish bonds. They seem more likely to sit on the extra capital and protect themselves.
- Yesterday’s MPC minutes revealed there is plenty of support for further QE in February, but this is to be expected. The growth outlook for the UK economy is flat in the first two quarters of next year, though there are hopes for a pick-up in the second half of 2012. Today’s finalised third quarter UK GDP figure was revised up to 0.6% from 0.5%, this pair is trading at €1.20 and there is scope for another upward move.
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STERLING/US DOLLAR: US stocks are trying to recover at present, which is taking funds away from the US dollar.
- The S&P stock index gained by 3.0% yesterday, funded to a large extent by US dollar. US data again ticked up in the form of improved existing home sales (though not by as much as hoped). Finalised US third quarter GDP is expected to remain at an annualised rate of 2.0% this afternoon.
- Sterling is trading up above $1.57 this morning despite rating agency Moody’s hinting that the UK’s AAA credit rating is vulnerable to downgrade. If this were to come to fruition, sterling would surely take a hit, but for now the market has turned a blind eye.
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EURO/US DOLLAR: A volatile day’s trading saw this pair climb to $1.32 before dipping almost two cents lower, as market concerns over eurozone bond yields persist.
- How eurozone bond yields are going to be brought down in the short-term was neglected at the EU Summit earlier this month, and yesterday’s ECB loan tender may have been an attempt to fill this void. European banks need to increase their capital ratios by the middle of next year in line with the Basel III criteria, so there is a good chance that yesterday’s high demand will be used for this, rather than to bring eurozone bond yields down.
- The euro is trading up at $1.31 thanks to a positive start for European stocks. This level looks a little high and could be corrected lower.
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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: A volatile session saw this pair edge higher as regional market confidence dried up, though kiwi GDP data was impressive.
- Appetite for the kiwi was weaker yesterday, but the third quarter New Zealand growth figure beat expectations to the upside, ticking up to 0.8% from Q2’s 0.1%. The strong showing can be put down to this autumn’s Rugby World Cup, but underlying growth was actually less impressive so the kiwi failed to rally.
- Sterling is trading at 2.03 this morning and although this pair has been losing ground this morning, risks are to the upside.
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STERLING/CANADIAN DOLLAR: Strong Canadian retail sales helped the loonie trade positively against the pound.
- Canadian retail sales came in well above expectations, climbing to an eight month high. Oil prices also continuing to climb, as are US stocks, which all played into the hands of the loonie yesterday. Taking a longer-term view of the Canadian dollar’s performance in 2011, it has actually been one of the worst performers, largely down to a US economic slowdown and worsening eurozone crisis.
- Sterling has lost ground to risky currencies in early trading but we should see a rebound as the session progresses.
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