Exchange Rates and Market Commentary [21/11/2011]

Exchange Rates and Market Commentary [21/11/2011]

Good morning.

Another regime change took place in the eurozone with Spain’s centre-right people’s party led by Mariano Rajoy storming to power, crushing the ruling socialist party. After debt crippled Greece and Italy, it was Spain’s turn to vote for change. Though Rajoy has promised to create new jobs – standing at over 21 per cent presently – while enforcing more austerity measures, the challenges are monumental.

Pressure continued to mount on the European Central Bank to become the lender of resort, similar to the Bank of England and the Federal Reserve. With a debt-pile of nearly €2 trillion for bigger economies like Italy, the European Financial Stability Facility (EFSF) – Europe’s lifeboat fund, is simply not big enough for bailouts. Germany is slowly waking up to the enormity of the problem. The head of European Bank for Reconstruction and Development (EBRD), a German himself, said on Monday that Germany’s past experience of hyper-inflation can’t be an excuse for not extending the EZ’s the monetary base. The ECB has refused to ‘print money’ in the past saying its statute only allows it to control inflation – an argument supported by the Germans. However, Chancellor Markel is slowly taking a more accommodating view – a party conference last week did approve bigger roles for the ECB, including playing the ‘lender of last resort’ role.


GBP/EURO – 1.1654
GBP/US$ – 1.5698
GBP/CHF – 1.4439
GBP/CAN$ – 1.6204
GBP/AUS$ – 1.5846
GBP/ZAR – 12.9742
GBP/JPY – 120.55
GBP/HKD – 12.9742
GBP/NZD – 2.0771
GBP/SEK – 10.6870

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EURO: Italy’s 10-year old maturity yields dropped below 7 per cent after the ECB bought Spanish and Italian bonds on Friday. This supported the common currency against the greenback and the EUR/USD pair touched a high of 1.3610. The ECB had apparently also backed a $27 billion weekly bond buying programme, a German newspaper claimed on Friday, though no independent confirmation was available. However, the euro failed to hold onto its gain and slipped to 1.3455 this morning. The GBP/EUR pair recorded little movement since Friday and opened at 1.1660 today morning.

USD: Sterling gained against the USD on Friday after ECB’s intervention and the GBP/USD pair hit a high of 1.5870. However, risk sentiment was back today after it transpired that the US Congressional Super Committee has failed to reach a consensus over a proposed $1.2 trillion budget cut. Economists have warned that a failure may trigger another ratings cut for the world’s largest economy.

Elsewhere, the antipodean currencies had gained against the greenback on Friday over news of ECB’s intervention. The gain however, proved short-lived as risk is off the table. That has allowed the cable to maintain its recent gains against the commodity currencies and both the GBP/AUD and GBP/NZD are trading now at 1.5825 and 2.0870 respectively.

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Have a great day.


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