Good morning and welcome to today’s foreign exchange market commentary on Wednesday the 28th of December.
The continuing EU crisis continues to weigh down investor sentiments globally as the euro remained subdued yesterday, though it managed to float above its recent 11-month low while eyes remain fixed on a scheduled Italian bond sale later this week. The currency is expected to be range bound and can come under pressure after German CPI data and Italy’s €8.5 billion bond sale takes off on Thursday.
Meanwhile, the much touted ‘Sarko Trade’, where the ECB had lent €489 billion to the region’s 523 banks to ease the liquidity crunch and ensure they buy EU member country bonds to keep borrowing costs low, seems to have no effect. EU banks over-night deposits went up to €452 billon with the ECB, the highest since euro’s introduction in 1999. Banks have chosen to deposit money at 0.25 per cent while the ECB have lent them the cash at 1 per cent, thus incurring losses. It remains to be seen whether banks buy up Italy’s debt tomorrow to keep borrowing costs low. Some analysts however termed parking of excess liquidity as routine since market activity remains muted during the festive period with little lending-borrowing taking place.
The UK government is meanwhile preparing for a full-blown euro crisis. The Treasury is working on plans to control flow of capital in and out of the UK and would be implemented if similar measures are taken across Europe to ease the switch to new currencies. If a weak member chooses to quit the EU, investors would rush to withdraw cash from that country and other peripheral EU states to transfer funds in safer havens. A heavy inflow will drive the Sterling up, widening Britain’s trade deficit dangerously and hampering British exports.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1985
GBP/US$ – 1.5660
GBP/CHF – 1.4638
GBP/CAN$ – 1.5965
GBP/AUS$ – 1.5414
GBP/ZAR – 12.7560
GBP/JPY – 121.80
GBP/HKD – 12.1790
GBP/NZD – 2.0246
GBP/SEK – 10.7262
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EURO: The common currency remained ranged-bound yesterday. The market remains subdued as the festive mood continues. However, Italy’s bond auction and German CPI data tomorrow is expected to decide the euro’s fate for the week. The EUR/USD pair opens at 1.3075 this morning while the GBP/EUR also shows little movement at 1.1990.
USD: The greenback was also trading within a narrow range yesterday over lack of economic data. The common currency bought $1.3063 yesterday while the dollar index remained stable around 79.830.
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Have a great day!