Dutch, Spanish and Italian bond auctions moderately successful

Dutch, Spanish and Italian bond auctions moderately successful

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 25th of April.

The continuing sovereign debt crisis poses downside risks though eurozone economy is stabilising, said European Central Bank President Mario Draghi in a speech to the Committee on Economic and Monetary Affairs of the European Parliament. He pointed out to renewed tensions in euro area sovereign debt markets and high commodity prices as possible pitfalls and predicted inflation moderation in early 2013.

Acknowledging that the 1 trillion EUR LTRO measure will not necessarily boost lending, he hoped that banks will use the funds to refinance the real economy. However, credit demand may remain subdued in the near future as money growth may remain weak for before economic growth picks up. However, Draghi urged governments to carry on reforms to ensure equilibrium in the EZ, noting that ECB is not solely responsible to address the imbalances.

Draghi’s speech however, contrasts with IMF’s former chief economist Professor Ken Rogoff. Terming the IMF funds inadequate to fight the current crisis, he said the crisis is about financial restructuring rather than fiscal and monetary stimulus. He warned that some of the current members may end up outside the union for the next 30-40 years since they are not ready for a fiscal compact. It’ll take a long time before the laggards caught up with the leaders on competitiveness and there’s a huge possibility of the union breaking up soon, he warned.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2235
GBP/US$ – 1.6134
GBP/CHF – 1.4703
GBP/CAN$ – 1.5932
GBP/AUS$ – 1.5654
GBP/ZAR – 12.561
GBP/JPY – 131.39
GBP/HKD – 12.5219
GBP/NZD – 1.9891
GBP/SEK –  10.871

EUR: Yesterday’s Dutch, Spanish and Italian bond auctions were moderately successful that supported the single currency, though Spanish yields breached the six percent mark yet again. The narrowing of the bund-periphery yields pushed the EUR/USD pair to a three week high ahead of today’s FOMC meeting. However, the Sterling strengthened against the euro and the pair rallied to 1.2277, its highest since August 2010. The cable remained at a two-and-a-half year high against a basket of currencies yesterday as demand for perceived safe-haven assets remained high. The single currency movement against the dollar will remain dependent on the FOMC meeting outcome today. The lower-than-expected Q1 GDP has weighed GBP/EUR down and the pair opens at 1.2185 this morning.

USD: The Sterling hit its highest level in six months against the greenback, changing hands at 1.6164 despite UK public finances data coming in weaker that anticipated. Economic data from the US came in weak yesterday though American corporate earnings continue to impress. The markets will remain focused on the FOMC meeting today though the Fed is unlikely to announce another round of QE anytime soon. The GBP/USD slipped this morning as UK Q1 numbers were softer at -0.2 percent against expectations of +0.1 percent and is trading at around 1.6098.

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