Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 1st of March.
Yesterday the markets witnessed strange movements despite the European Central Bank deciding to open the liquidity tap and deciding to lend half-a-trillion Euros to the regions banks.
The European banking sector was witness to the ECB’s benevolence yesterday as the central bank printed a further €529 billion to ease the liquidity situation. The second leg of LTRO will ensure the banks in the region remain highly leveraged for the next three years, though it may prevent a post-Lehman type crisis in the short term. The question that begs to be asked is if the move will benefit the real economy. If the banks indulge in “carry trades”, as they are expected to do to keep sovereign borrowing costs low, the region’s governments can ratchet up spending to ensure economic expansion. But without long-term fiscal reforms, the Greek story might get repeated after three years if governments fail to pay and banks are forced to book massive losses. The stage would be set for a self-sustaining vicious cycle.
Also, private sector lending should be given priority to kick-start the ailing economies and boost job creation. Economies of every size in the EU region need to start the fiscal consolidation process before banks start buying sovereign debts again. High levels of debt can only be sustained if the tax-base expands at a faster rate.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1949
GBP/US$ – 1.5916
GBP/CHF – 1.4405
GBP/CAN$ – 1.5741
GBP/AUS$ – 1.4818
GBP/ZAR – 11.9384
GBP/JPY – 129.01
GBP/HKD – 12.3396
GBP/NZD – 1.9072
GBP/SEK – 10.5352
EURO: The single currency was well supported against the greenback yesterday ahead of ECB’s second leg of LTRO. The market had priced in €500 billion worth of liquidity injection and the EUR/USD pair remained well bid. The actual figure of €529.5 billion was not far off from median estimates and the pair remained steady in the first half. However, Fed Chairman Bernanke’s less dovish testimony before the Congress where he failed to mention continuing the asset purchase program boosted the dollar and the EUR/USD pair dropped to 1.3340 despite touching 1.3470 in morning trade. The GBP/EURO pair opens at 1.946 today morning.
USD: Sterling surged against the greenback yesterday and touched an intraday high of 1.5993 though it couldn’t break the psychological 1.6000 level. The cable remained well supported as economic data came in much better than expected including number of mortgage approvals, net lending to individuals and M4 money supply. The GBP/USD changed hands at 1.5925 at closing yesterday. The dollar index, a barometer of the greenback’s strength against a basket of six currencies, rose to 78.806 from 78.274 the previous session. Month end selling of the euro also helped cable surge against the single currency and the GBP/EUR pair opens at 1.5915 today morning. UK manufacturing data is due today.
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Have a great day ahead!