Bob Diamond’s exit: a turning point in banking industry

Bob Diamond’s exit: a turning point in banking industry

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 27th of July.

The recent exit of Barclay’s Bob Diamond will go down as a turning point in banking history. True, CEOs of major banks have not been eased out of office before; Oswald Grubel was shown the door for failing to prevent $2.3 billion in unauthorised trading while Chuck Prince of Citigroup left in the run up to the financial crisis of 2008.

Diamond however, left when he was supposedly in control, having survived the 2008-09 crisis without government support and the more recent product mis-selling scandal. Media reports suggest that the regulators were willing to give Diamond the free pass till a political storm raged and Diamond fought back, pointing a finger at the Bank of England. That proved his undoing.

Diamond possibly was under the impression he can survive by taking on the establishment. A conversation with senior BoE official Paul Tucker was leaked to the media, indicating BoE was aware of the LIBOR rate manipulation.

He however forgot that banks with big balance sheets compared to its home economy, exists solely due to its ability to connect with the regulators. Banks the size of Barclays, with a balance sheet size of $2.5 trillion that is roughly the size of UK GDP, survives on the implicit guarantees of government, giving them the “too big to fail” tag.

Diamond possibly believed in his own rhetoric, that Barclays is critical for the prosperity of the UK. However, when regulators called his bluff, he had to resign.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2758
GBP/US$ – 1.5675
GBP/CHF – 1.5328
GBP/CAN$ – 1.5828
GBP/AUS$ – 1.5042
GBP/ZAR – 12.9145
GBP/JPY – 122.72
GBP/HKD – 12.1620
GBP/NZD – 1.9532
GBP/SEK – 10.7591

EUR: Following European Central Bank President Mario Draghi’s assurance on the common currency, the euro surged ahead against the greenback as shorts ran for cover. Draghi’s statement meant the central bank may initiate bond purchase from the secondary markets to bring down Spanish and Italian borrowing costs. His mere statement calmed the markets with both Spanish and Italian 10-year bond yields dropping below 7 percent and 6 percent, respectively. The prevailing strength of euro dragged the GBP/EUR to a low of 1.2718 from the opening high of about 1.2770. The European economic data calendar is light on the ground while Q2 GDP data is due from the other side of the Atlantic later in the day. The GBP/EUR pair opens at 1.2763 this morning.

USD: The GBP/USD marched ahead yesterday taking a cue from the upward movement of the EUR/USD pair and finishing the day 1.2 percent higher. Following Mario Draghi’s pledge to preserve the euro, risk assets rallied as investors shunned the greenback that subsequently pushed the dollar index – a barometer of the USD’s strength against a basket of six currencies, down by about one percent. Focus today will remain on US Q2 GDP numbers and any weakness may increase the clamour for further monetary stimulus by the US Federal Reserve. The GBP/USD pair opens at 1.5677 this morning.

Have a great weekend!

 

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