Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 30th of October.
US Fed chairman Ben Bernanke figured out driving down housing rates further will stimulate the housing market by inducing home buyers. Since mortgage rates are already extremely low, home buyers didn’t show much enthusiasm for the first two rounds of QE. Many observers have commented that the Fed is on the path of monetary expansion to reduce the Treasury’s huge debt by giving real negative returns to bond holders. While the central bank may not have any ulterior motive, it has certainly created a new set of relationships and has its winners and losers.
The low cost of borrowing keeps expenses lower even when the amount of borrowing rises, and may encourage the administration to keep borrowing while federal debt mushrooms. The Fed also returns the interest on agency securities and bonds it hold to the Treasury after deducting its own operating expenses, helping it offset the deficit. Central banking is serious business. Federal Reserve creates money out of thin air, lends it to the government and sends back the interest after expenses.
Federal Reserve, of course, isn’t the only beneficiary of low rates. Investment grade corporations have been able to issue and refinance debt at lower rates. Eligible mortgage borrowers are also getting a good deal at 3.4 percent for 30 years.
Also low interests have made highly leveraged speculation in commodities relatively cheaper. However, commodity prices have declined on balance over the past 12 months suggesting droughts and low cost funds have been offset by a global economic slowdown.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2401
GBP/US$ – 1.6042
GBP/CHF – 1.4996
GBP/CAN$ – 1.6057
GBP/AUS$ – 1.5480
GBP/ZAR – 13.9235
GBP/JPY – 127.42
GBP/HKD – 12.4372
GBP/NZD – 1.9530
GBP/SEK – 10.7112
EUR: The single currency weakened against the US dollar yesterday and the EUR/USD pair has traded around the 1.2900 level in the last 24 hours. The euro came under further pressure after German Finance Minister Wolfgang Schäuble rejected extending Greece’s deficit reduction target deadline and fresh questions were raised over Spanish bailout possibilities. A sharp decline in Spanish retail sales didn’t help the common currency’s cause either. The President of the European Central Bank is due to speak today and the euro may witness some volatility over significant announcements. The single currency has recovered somewhat in the morning session after Spanish GDP came in at -0.3 percent q/q vs. expectations for -0.4 percent. The economic data calendar from Europe is loaded today with the German unemployment data and European retail PMI being the main attractions. Also Italy is due to auction its benchmark 10-year notes today.
USD: Risk aversion among investors as hurricane Sandy approached US East Coast pushed the greenback higher yesterday. Still, the cable managed to hold ground while Wall Street decided to switch off for the first time since 9/11. Financial markets have remained relatively calm as the worst of the storm passed over the city. UK money supply figures met market expectations yesterday while mortgage approvals printed above expectations. However, sterling struggled later after BoE’s chief economist suggested next quarter GDP growth will be significantly lower, citing Olympics as the driver behind the sudden surge in the prior quarter. We have the UK CPI data due today and a miss by wide margins may trigger some volatility. The GBP/USD pair opens at 1.6045 this morning.
Have a great day!
