Good morning and welcome to today’s foreign exchange market commentary on Friday the 13th of January.
ECB president Mario Draghi must be a relieved man. Just when murmurs had started over the efficacy of ECB’s strategy to lend cheaply to banks (LTRO) in order to bring down sovereign borrowing costs, Spain and Italy successfully raised €22 billion at a sharply reduced rate, thus proving Mr. Draghi right. Spain raised €10 billion yesterday by selling 3 and 4-year government securities, nearly twice as much than originally planned, that many claimed vindicates new PM Mariano Rajoy’s austerity plans. However, security auction data – expected in the next couple of days, will tell us if the demand was due to the so-called ‘Sarko trade’ – where banks execute ‘carry trades’ (borrow cheap from ECB at 1 pc and lend higher to pocket the difference), or the ECB’s bond buying program.
Italian PM Mario Monti should take heart as well since the country managed to raise €12 billion at a yield of 2.735 pc, nearly half of last month’s bond auction. This is Rome’s lowest borrowing cost since March 2011. The country’s stock market rose 2 pc while the single currency strengthened on the news. Buoyed by the success, Irish PM Enda Kenny announced his country may return to the bond market next year. Longer duration Italian debt will be on the block today and the auction result will decide the common currencies movement today.
The Bank of England didn’t spring any surprise and decided to continue with the 0.5 pc rate. There was no word on increasing the asset-purchase target from £225 billion either. So it was a pretty dull day yesterday.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1938
GBP/US$ – 1.5382
GBP/CHF – 1.4479
GBP/CAN$ – 1.5639
GBP/AUS$ – 1.4844
GBP/ZAR – 12.3756
GBP/JPY – 117.88
GBP/HKD – 11.9349
GBP/NZD – 1.9362
GBP/SEK – 10.6232
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EUR: The common currency gained ground yesterday on short-covering after ECB president Mario Draghi eased investor worries on the crisis. The central bank’s measures to ease the interbank liquidity issues were well accepted by the markets as evident from yesterday’s successful auction of Spanish and Italian debt. Interest rate was left untouched at 1 pc, as the market had anticipated. A strong demand for euro meant the sterling was pushed on the back foot and the GBP/EUR closed the day at a low of 1.1940. Sterling gains marginally today and the pair opens at 1.1950 this morning.
USD: The cable tumbled against the greenback in early trading yesterday to 1.5279 just before the Industrial Production data was out. The reading came in lower than expected, but the cable was well supported as the BoE didn’t revise asset purchase target upwards, as widely anticipated. GBP soon gained traction as US retail sales number came in lower than expected, sparking speculations of another round of QE this year. UK PPI numbers and the US consumer confidence and trade balance data is expected today. The GBP/USD pair opens higher at 1.5385 today morning.
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Have a great day!
