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

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

Good morning. Sterling made a smart recovery on Friday against most of its G10 counterparts as risk aversion among investors receded despite the Bank of England announcing quantitative easing on Thursday. Higher than expected Non-farm payroll hike in the US is said to be the trigger as fears of the US sliding back into a double-dip recession eased. The UK PPI numbers – which came in higher than expected, also helped Cable. The market seems to have taken the downgrade of 12 UK banks and credit societies in its stride.

Ratings agency Fitch downgraded Spain and Italy late Friday evening. While Italy’s downgrade didn’t come as a surprise – since Moody’s and S&P have already cut its rating and Fitch simply followed, the Spanish downgrade did come as a surprise. Fitch cited high debt levels and weak economic growth as the reason for downward revision.

Europe is again expected to hog the limelight this week as Merkel and Sarkozy issued a joint statement stating that “By the end of the month, we will have responded to the crisis issue and to the vision issue.” As French and Belgian governments step in to save Dexia bank from collapsing, expect a ratings cut for Belgium in the coming weeks. Moody’s have already put the country on negative watch on Friday as Belgian government alone picks up the €4 billion tab for Dexia. The details on the creation of a ‘bad bank’ that holds all toxic assets and bonds is expected later today. Dexia bank’s balance sheet have also put a question mark over France’s status as a AAA economy.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1530
GBP/US$ – 1.5618
GBP/CHF – 1.4277
GBP/CAN$ – 1.6090
GBP/AUS$ – 1.5790
GBP/ZAR – 12.2510
GBP/JPY – 119.68
GBP/HKD – 12.1620
GBP/NZD – 2.0074
GBP/SEK – 10.5270

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EURO: The single currency gained against the greenback on Friday to hit an intraday high of 1.3525. However, the gains could not be sustained as news of Fitch downgrading both Spain and Italy hit the market. The GBP/EUR pair ended Friday on a low of 1.1637. However, the euro opened stronger today morning as Markel and Sarkozy’s weekend announcement gives rise to the hope of an announcement of bank recapitalization measures next month.

USD: The Cable jumped against the USD on Friday to touch 1.5645 from start of about 1.5450. MPC member Martin Weale’s announcement over the weekend that the BoE may consider further QE measures had its effect on the Cable. However, Sterling regained its 1.5600 level this morning and opens at 1.5650.

Elsewhere, the AUD and the NZD gained against the Greenback while the Swiss Franc plunged to a 4 ½ month low against the euro on Friday.

Have a great day.

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