Manipulation of Libor Rates Rears Diamond Head

Manipulation of Libor Rates Rears Diamond Head

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 3rd of July.

It’s banking problems galore!

It’s raining banking problems, with the manipulation of LIBOR rates by Barclays being the latest one to hit the wires. Two weeks back it was an information systems glitch at RBS that had rendered thousands scratching their heads, unable to access their money. Banking problems have become a regular event, a part of the social fabric and people start missing them if a month goes by without some john doe being caught in the act!

The LIBOR or the London Interbank Offer Rate is a hypothetical measure of the cost of borrowing for a single day. It was introduced in order to provide a benchmark interest rate for pricing the new age financial risk instruments: forward contracts, futures, swaps and options.

However not before long, it was being used for all sorts of loans including mortgages and car loans not only in Britain, but across the world, making it the most important index in world finance. It is said LIBOR is the benchmark for pricing instruments in excess of $350 trillion, equivalent to many times the global GDP.

The implications of manipulating the LIBOR is incalculable since it means by jacking the rate higher, millions of borrowers were forced to pay more on their loans and conversely, when they were artificially lowered, millions of depositors were short-changed. Don’t be surprised if money market biggies start claiming compensations for losses on derivative instruments priced off LIBOR.
A second appearance by Barclays chief Bob Diamond before the Treasury Select Committee is expected and don’t be surprised if he claims total ignorance while throwing subordinates under the bus. Bank CEOs change colour faster than chameleons; they are quick to justify their obscene bonuses on the profits generated by traders, yet plead unawareness when the tides turn.
The latest scandal has dealt a body blow to London’s reputation for integrity and transparency. Unless bankers are given exemplary punishments like in the US, businesses may start looking at other destinations.


GBP/EURO – 1.2448
GBP/US$ – 1.5697
GBP/CHF – 1.4962
GBP/CAN$ – 1.5943
GBP/AUS$ – 1.5305
GBP/ZAR – 12.7176
GBP/JPY – 125.22
GBP/HKD – 12.1751
GBP/NZD – 1.9528
GBP/SEK – 10.8690

EUR: The euphoria over last Friday’s successful summit waned on Monday after a report showed Eurozone’s unemployment levels rose to an euro-era high of 11 percent in May, putting downward pressure on the single currency. The EUR/USD pair came under further pressure after Finland opposed the use of the European Stability Mechanism for directly purchasing sovereign bonds from secondary markets, one of the main measures agreed by EU leaders to bring down Spanish and Italian borrowing costs. This single development has split open the deep division that run within Europe and jeopardized the prospects of EUR longs. GBP/EUR tracked higher from the onset on Monday to touch 1.2477 by mid-afternoon. The economic data calendar is light today and the implementation risk of last Friday’s EU measures is likely to dictate the EUR movement today. The GBP/EUR opens at 1.2460 this morning.

USD: The UK manufacturing PMI number for June at 48.6 was above market expectations but below the key contraction/expansion level of 50 for the second straight month, putting the cable on back-foot in late afternoon trading on Monday. This also strengthens the case of the more dovish MPC members calling out for further quantitative easing. Weak ISM number from the US on Friday had pushed the GBP/USD to breach Friday’s highs amid speculations of QE3 from the Federal Reserve and pushing sterling to 1.5721 by mid-afternoon. The Pound’s high levels weren’t to last long as soft manufacturing PMI number from the UK, Europe and the US brought the GBP/USD pair down to 1.5660 levels by mid-afternoon. With not tier-1 economic data due from either sides of the Atlantic, risk appetite is expected to drive the GBP/USD pair today. The GBP/USD pair opens at 1.5692 today morning.


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