Exchange Rates and Market Commentary [18/01/2012]

Exchange Rates and Market Commentary [18/01/2012]

Good morning and welcome to today’s foreign exchange market commentary on Monday the 18th of January.

All’s not lost for the euro, not at least in the near term. Despite the EU region’s lifeboat fund suffering a downgrade from Standard & Poor’s, the EFSF managed to sell six-month maturity bills at a yield of 0.2664 pc, which is slightly higher than the previous auction. People who had written the obituary of the single currency may have to wait a little longer, or may be forever. The recent move by the European Central Bank (ECB) to pump-in half-a-trillion Euros worth liquidity (the LTRO) in the region’s banks certainly indicates that the central bank is not going to give up without a fight. Nor the region’s political leaders will surrender meekly to the crisis. The recent depreciation of the common currency has a potential upside; it makes exports cheaper and hence, more competitive. This is expected to benefit all the countries in the region to a varied degree, but the biggest beneficiaries will be the net exporters like Germany.

The common currency however, made a strong recovery yesterday after the German ZEW consumer confidence numbers came in. The reading jumped from -53.8 to -21.6, the biggest leap in history. Agreed it is still in the negative territory, but it won’t be long before Germany again starts firing on all cylinders. A biggest turning point in the crisis could be the agreement of greater fiscal union among member states. An agreement to that effect is expected by March.

Another interesting event to look out for is the Portuguese short-term debt auction today. S&P had cut the country’s debt to junk on Friday. The probability of default by Portugal has been estimated at 65 pc over the next five years, an extension of the contagion theory based on the Greek default probability.

Back home, the unemployment data for December is due today. CPI data released yesterday showed a slight moderation; headline inflation dropped to 4.2 pc from 4.8 in November. This is indeed good news, and if the economy shows signs of a slowdown, some skeptics are already saying UK is witnessing a double-dip recession, the BoE Governor can initiate another round of quantitative easing without worrying too much.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2032
GBP/US$ – 1.5356
GBP/CHF – 1.4551
GBP/CAN$ – 1.5591
GBP/AUS$ – 1.4791
GBP/ZAR – 12.3096
GBP/JPY – 117.72
GBP/HKD – 11.9142
GBP/NZD – 1.9130
GBP/SEK – 10.6031

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EUR: The euro strengthened yesterday against the greenback as risk sentiments improved after stronger manufacturing data from the US and better-than-expected GDP numbers came in from China. The cable however, remained range-bound in the 1.2000 and 1.2080 band and there was no impetus for breaching that level. Greek debt talks are scheduled to restart today and it’s already under the cloud after ratings agency Fitch announcing that a default is almost certain for the peripheral state. There’s not much economic data due from Europe today except German and Portuguese bond auctions in the morning. The GBP/EUR pair opens at 1.2006 this morning.

USD: The greenback lost ground against its leading counterparts as risk appetite was higher yesterday. Sterling pushed up against the USD in early trade but could not breach the 1.5400 level. The UK unemployment data is due today and a higher number may trigger the BoE to inject with another round of liquidity in February. The dollar is expected to firm up as Greek debt talks resume today. The GBP/USD opens at 1.5336 this morning.

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Have a great day!

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