Exchange Rates and Market Commentary [22/12/2011]

Exchange Rates and Market Commentary [22/12/2011]

Good morning and welcome to today’s foreign exchange market commentary on Tuesday the 20th of December.

Yesterday’s Long Term Refinance Operation (LTRO) conducted by the European Central Bank got an overwhelming response from the EU member-country banks. By the end of the day, 523 banks borrowed €498 billion, which works out at €935 million on an average per bank. The market euphoria that followed proved to be short-lived as economists realised that though an imminent credit crunch has been averted, the sovereign debt crisis remains far from over.

The fresh cash injection of near half-trillion Euros, initially hailed as ‘game changer’, is hardly new money. An estimate by RBS showed nearly 61 pc or €298.5 billion has been recycled from the ECB’s existing or maturing operations this week and fresh liquidity stands at about €191 billion.

Analysts are divided over the effect of new money on the system. Sceptics point out if banks are to conform to the new Tier 1 capital requirement of 9 per cent, they would need to raise €2.5 trillion by next June. Another €230 billion of bonds will mature by the first quarter of 2012, putting additional stress on cash. As a result, banks are desperately cutting risky assets on their books to avoid raising fresh capital. Those not exposed to risky sovereign debts are unlikely to start buying them any time soon. Thus the LTRO is unlikely to solve the sovereign debt crisis it was intended to do. Furthermore, even if the money flows to the government coffers, they will fall well-short of the actual requirements.

To begin with, Borsa Italiana announced 14 Italian banks have committed to government-backed securities worth €40 billion for ECB collateral. The new move will reinforce the bank-state nexus rather than weakening it, RBS observed. However Italy, whose GDP shrunk by 0.2 per cent in Q3 and may continue to do so as tough new austerity measures come into effect, may be saved from its fifth recession since 2001 with the ECB’s latest move. The next round of LTRO is due in February.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2002
GBP/US$ – 1.5674
GBP/CHF – 1.4665
GBP/CAN$ – 1.6094
GBP/AUS$ – 1.5530
GBP/ZAR – 12.8982
GBP/JPY – 122.45
GBP/HKD – 12.8982
GBP/NZD – 2.0375
GBP/SEK – 10.7814

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EURO: Sterling gained against the common currency to hit the 11 month high yesterday and managed to stay above the 1.20 level as domestic tax collection reading came in stronger than expected despite a faltering economy. However, benefit expenses were also reported higher. The BoE MPC minutes showed asset purchases are unlikely to cross the £275 level soon, strengthening the cable further.

USD: The Pound touched 1.5678 yesterday against the greenback after MPC minutes showed policymakers will continue with the present bank rate of 0.5 per cent while asset purchases are unlikely to cross the targeted £275 billion. The euro fell to 1.3084 against the USD yesterday after reaching a high of 1.32 in early trading, though there were no new economic data from the other side of the Atlantic.

Elsewhere, Canadian dollar remained flat yesterday despite retail sales figure coming out stronger than expected.

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Have a great day!

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