Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 12th of July.
In the wake of the LIBOR rate scandal, the British government and the European Commissioner Michael Barnier have proposed regulating the benchmark interest rate, and other important interest rates. Whether the proposed new measures will hit the target or backfire is open to debate. They may give rise to new misbehavior or fraud; but one thing is abundantly clear as the financial crisis enters the sixth year, the era of self-regulation must be scrapped.
Regulators globally pay the catch-up with the markets always a few steps ahead with innovations, good or bad. Some quarters will certainly term regulation of private benchmarks, which markets are flushed with, as regulatory overreach. And the question when they become so important that public regulation becomes legitimate isn’t an easy question either. However, in the case of LIBOR, which has become the benchmark for trillions of dollars worth contracts, that threshold has long been passed.
A similar scenario exists in the credit-ratings segment where an unregulated and oligopolistic market flourishes. Market fundamentalists have argued that mere numbers for credit-ratings should remain outside the reach of regulators while ratings agency have tried to hide behind the veneer saying regulation will curb their ability to voice opinions freely.
The BoE has suggested that ‘benchmarks’ should be based on observable market trends rather than guesswork. That’s a good option to begin with. Also steep penalties with criminal liability for misbehavior should be made an option so that market players think twice before committing fraud.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2648
GBP/US$ – 1.5474
GBP/CHF – 1.5201
GBP/CAN$ – 1.5806
GBP/AUS$ – 1.5222
GBP/ZAR – 12.8612
GBP/JPY – 122.73
GBP/HKD – 12.0053
GBP/NZD – 1.9561
GBP/SEK – 10.8568
EUR: The single-currency continued to weaken against the cable yesterday with the GBP/EUR touching a new 3-1/2 year high of 1.2706 while the EUR/USD touched a new two-year low of 1.2213 as euro selling was relentless despite the lack of any negative tier-1 economic report from the region. One of the triggers for the common-currency’s sell-out was the Federal Reserve’s less-dovish than anticipated FOMC minutes which indicated the central bank is unlikely to initiate any monetary stimulus measures in the near term. European industrial production data is due today while ECB President Mario Draghi will attend a press-conference later in the day though they are unlikely to have material effect on the single-currency. The GBP/EUR opens at 1.2654 this morning.
USD: The greenback gained across the board even though the GBP/USD started off the day strongly on the back of good interbank demand to touch an intraday high of 1.5578. However, the greenback rallied sharply following the release of the FOMC minutes, sending the cable down to 1.5484. The latest June 19-20 minutes showed few members supported another round of assets purchase unless the unemployment scenario deteriorated further, clearly going against market expectations. The Pound is unlikely to rise against the dollar in the absence of any tier-1 data from the UK while continued negative sentiment over Europe is likely to push the greenback up further today. The GBP/USD opens at 1.5468 this morning.