Good morning and welcome to today’s foreign exchange market commentary on Tuesday the 6th of December.
The new EU treaty that we talked about yesterday to bring in more fiscal discipline in the eurozone may include a ‘commitment not to force private sector bondholders’ to book losses on future EZ bailouts. This principle probably explains the sudden rally of Italian sovereign securities that we saw yesterday. However, the mood changed after rumours hit the market that ratings agency S&P may downgrade 15 European nations at about 19.00 UK time. This was formally confirmed at about 21.00 UK time and the failure of politicians to find a solution to the region’s debt crisis was cited as the reason. Unfortunately, the list has the names the stronger economies in the region including Germany, Finland, France and the Netherlands – all AAA economies.
The prospect of another round of rate cut by the European Central Bank brightened after ECB President Mario Draghi said the bank had a responsibility to ensure inflation did not undershoot the targeted 2 per cent, not just arresting an overshoot. The move is likely to offer ultra-long liquidity facilities to banks currently struggling with their liquidity positions. The markets have reacted positively to the latest developments. One of the main gauges of market expectations – the Euribor futures, indicate a rate cut this month and some more later.
The recent jump in overnight bank deposits with the ECB highlights the freeze in interbank lending activities. To prevent the bloc’s economy choking, the ECB may extend the term of loans to banks to 2 or even 3 years. The extra-long liquidity 1 year tenders were first introduced by the ECB in June 2009 and renewed offers to lend banks in two separate operations this year.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1681
GBP/US$ – 1.5614
GBP/CHF – 1.4501
GBP/CAN$ – 1.5902
GBP/AUS$ – 1.5328
GBP/ZAR – 12.6120
GBP/JPY – 121.42
GBP/HKD – 12.1514
GBP/NZD – 2.0128
GBP/SEK – 10.5901
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EURO: Monday’s optimism over Sarkozy-Merkel meet proved short-lived after ratings agency put the remaining six AAA EZ nations on the negative credit watch list, reminding that the core nations are not immune to the ongoing debt problems. Since no serious economic news is expected today, it is safe to assume that the focus will remain on the weekend EU summit. The GBP/EUR pair opens at 1.1686 today morning.
USD: Better than expected UK November PMI reading of 52.1 from 51.3 in October triggered the pound rally against the greenback yesterday. However, cable failed to sustain the momentum as the S&P downgrade news hit the market. The USD gained as sentiments tanked and investors sought refuge in safe haven assets. The greenback is expected to remain strong today as the GBP/USD pair opens at 1.5600 this morning.
Elsewhere, AUD weakened after the Australian central bank cut rates by 25 bps, further putting pressure on the commodity currencies.
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Have a great day!
