Exchange Rates and Market Commentary [04/10/2011]

Exchange Rates and Market Commentary [04/10/2011]

Good morning. As Greece inches towards default, the safe havens continue to rally. The USD and the JPY strengthened yesterday after the EU finance ministers’ meet failing to yield any result. The participants failed to reach a consensus, which effectively means that the next IMF tranche for Greece may be delayed. Global markets can expect some turbulent times ahead until effective measures are announced by the EU to cope the Greek crisis.

The single currency reacted in a predictable manner and weakened further overnight to hit 1.17 against the GBP and 1.32 against the USD. The Euro received another jolt over speculations of Greek Prime Minister George Papandreou stepping down. A government later termed the news as ‘rubbish’, but the single currency had already taken a hit.

The market is also worried that a possible Greek default would not only hit European banks, but may shake lenders across the Atlantic as well. The cost of insurance against default has in fact soared for some US banks, with CDS spreads now wider than their European counterparts.

The market was so ‘spooked’ on Monday that positive readings of US auto sales and manufacturing failed to lift sentiments.

Positive news emerged yesterday for the UK as S&P reaffirmed its AAA rating for the country. Manufacturing PMI was also positive after declining for 8 consecutive months. S&P said UK remains a “wealthy, open and diversified economy, supported by a well-established political system and macroeconomic policy framework.” However, the ratings agency predicted that the economy will grow at the rate of 1.8% between 2011 and 2014, much lower than the Office of Budgetary Responsibility’s projected 2.5%.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1695
GBP/US$ – 1.5423
GBP/CAN$ – 1.6269
GBP/AUS$ – 1.6255
GBP/ZAR – 12.72
GBP/JPY – 118.15
GBP/HKD – 12.0892
GBP/NZD – 2.0442

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EURO: The single currency continues to slide as a solution to the Greek crisis continues to elude EU leaders. Many eurozone banks are at risk because of their exposure to Greek debts. This fear was highlighted as Franco-Belgian bank Dexia fell 31 percent on the bourses because of its heavy exposure to Greek debts. Greece is unlikely to get any funding till November, but the country’s leadership has assured that it can sustain till that date. The GBP/EUR pair has risen slightly today and opened at 1.1685. The EUR/USD pair is trading around 1.3167.

USD: The USD strengthened against the GBP yesterday over better than expected manufacturing data. The pair opened at 1.5405 this morning. The Euro fell to a low of 1.3163 against the greenback before regaining some ground at 1.3207.

Elsewhere, the AUD and NZD continued their downward journey. The GBP/AUD pair opened at 1.6274 while the GBP/NZD pair opened at 2.0422. The commodity currencies continued to weaken against the USD and AUD/USD pair begins the day at 0.9461 while NZD/USD is trading at about 0.7540.

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