Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 18th of July.
The fallouts of the LIBOR scandal!
The latest bank scandal jolting the financial world is expected to run indefinitely and nobody’s quite sure where it will end. However, there are a couple of important conclusions we can draw from the mess.
First the LIBOR (and the EURIBOR, NYIBOR, HKIBOR etc.) have become irrelevant and don’t represent the inter-bank borrowing costs or any other meaningful quantity. We have a funny situation where financial institutions who have been parties to trillions of dollars worth contracts have systematically manipulated the index.
It has become evident now that the process of generating this synthetic rate needs to be changed to something more transparent and tangible. If borrowing costs were reported with due diligence, we may have no landed in the soup that we are in at all. If markets knew that the rates banks pay to borrow are actually closer to the Greek government debt, bank stocks would have declined much faster and their castle-in-the-air building schemes would have been stopped much earlier. A replacement for LIBOR may take months, if not years though we now know how much banks trust each other, or how much the general public trusts the banks.
The other issue is about the ‘Chinese Wall’ between investment banking and banks’ deposit taking operations that apparently ensures customer deposits are not available to the casino. A return to Glass-Steagall, as advocated by Mervyn King, to separate investment banking and deposits is necessary since the alternative regulation is so tight that it would stifle the former industry altogether.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2733
GBP/US$ – 1.5637
GBP/CHF – 1.5292
GBP/CAN$ – 1.5843
GBP/AUS$ – 1.5182
GBP/ZAR – 12.7984
GBP/JPY – 123.55
GBP/HKD – 12.1362
GBP/NZD – 1.9668
GBP/SEK – 10.8932
EUR: Cable marched ahead of the single currency yesterday with the Pound hitting a high of 1.2769 after inflation data from UK showed the reading slumping to a 4-1/2 year low. The EUR/USD pair also sank to 1.2187 as Fed Chairman Bernanke offered no details of further monetary stimulus by the central bank as widely anticipated by the markets. The euro however, pared much of its earlier losses after it transpired that Bernanke confirmed that the central bank stands ready to intervene if required. German ZEW numbers fell short of market expectations, but unlikely to have much impact on investor sentiments yesterday. The single currency is likely to remain range-bound against both the greenback and the cable today in the absence of any tier-1 data from UK today. GBP/USD opens at 1.2735 this morning.
USD: The GBP/USD pair got off its recent high yesterday as UK inflation number for June came in the lower than expected, in fact the least since November 2008. The greenback continued to gain traction throughout afternoon after US Fed Chairman Bernanke said the central bank stands ready to intervene, but offered no further details that the market was hoping for. The pair ultimately lost 0.1 percent on the day to close at over the 1.6000 handle. The BoE MPC minutes are due today and a unanimous decision on further quantitative easing is being widely anticipated. The UK unemployment data is also expected to attract some market attention while the tier-1 economic data calendar from the other side of the pond is light today. The GBP/USD pair opens at 1.5635 this morning.
Have a great day!
