Good morning and welcome to today’s foreign exchange market commentary on Tuesday the 20th of December.
ECB President Mario Draghi has made a smart move. He has tried to give the markets mid-term relief by offering a different kind of ‘credit easing’ without violating the ECB’s mandate. His offer of unlimited credit to the region’s banks through long-term repo operations (LTRO) that allows them to borrow at 1 per cent has hedge funds across the globe excited. Banks can now use the money to buy Italian and Spanish sovereigns at 5 pc or 6 pc yield, thus propping up the peripheral states and managing to keep a healthy interest margin.
The so-called “Sarkozy Trade” – after the French President said the sovereign states should tap their banks for asset purchase, is expected to avoid a liquidity squeeze. The ultra-cheap and long funding will stimulate the money market, tempting banks to lend firms and private consumers. The credit situation in Europe remains grim, warned Draghi as EU states and EMU banks would require €720 billion over the first quarter of 2012. Draghi also cut the reserve requirements for banks, freeing up €100 billion in lending amount for the region.
Yield on Spain’s three-month notes nose-dived to 1.74 pc yesterday from 5.11 pc last month. Yield on 10-year notes also fell below 5 pc for the first time in two months. More than ten Italian banks are expected to line up for the loan, sources said.
However, the jury is still out over whether the banks will use the funds to buy sovereign debts. EMU banks have already cut EMU bond holdings by €65 billion to meet EU’s core tier one capital ratio of 9 pc. The new liquidity will prevent a Lehman-style collapse at best but will not solve the fundamental problems, they argue.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1968
GBP/US$ – 1.5704
GBP/CHF – 1.4586
GBP/CAN$ – 1.6081
GBP/AUS$ – 1.5417
GBP/ZAR – 12.7462
GBP/JPY – 122.15
GBP/HKD – 12.2231
GBP/NZD – 2.0256
GBP/SEK – 10.7314
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EURO: The single currency strengthened against the greenback yesterday as German business climate and consumer confidence came in stronger than expected. However, overall investor sentiment still remains negative over the continents growth prospects. The Euro advanced against the USD this morning to open at 1.3136 while it lost ground against the Sterling. The GBP/EUR pair opens at 1.1967 today morning.
USD: Greater investor risk appetite sees the cable inching up against the greenback. Positive news from Germany saw the Sterling jump over the 1.5600 level yesterday. Successful auction of Spanish debt pushed the GBP/USD pair further up and it traded on either side of 1.5650 yesterday. The Pound maintained its momentum today although UK consumer confidence came below expectation yesterday. The GBP/USD pair currently sits at 1.5727 as investor demand for safe haven currencies ease.
Elsewhere, both the Canadian and the Australian dollars advanced against the greenback yesterday over better risk appetite.
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Have a great day!
