Good morning and welcome to today\u2019s foreign exchange market commentary on Tuesday the 20th of December.<\/p>\n
ECB President Mario Draghi has made a smart move. He has tried to give the markets mid-term relief by offering a different kind of \u2018credit easing\u2019 without violating the ECB\u2019s mandate. His offer of unlimited credit to the region\u2019s banks through long-term repo operations (LTRO) that allows them to borrow at 1 per cent has hedge funds across the globe excited. Banks can now use the money to buy Italian and Spanish sovereigns at 5 pc or 6 pc yield, thus propping up the peripheral states and managing to keep a healthy interest margin.<\/p>\n
The so-called \u201cSarkozy Trade\u201d \u2013 after the French President said the sovereign states should tap their banks for asset purchase, is expected to avoid a liquidity squeeze. The ultra-cheap and long funding will stimulate the money market, tempting banks to lend firms and private consumers. The credit situation in Europe remains grim, warned Draghi as EU states and EMU banks would require \u20ac720 billion over the first quarter of 2012. Draghi also cut the reserve requirements for banks, freeing up \u20ac100 billion in lending amount for the region. <\/p>\n
Yield on Spain\u2019s three-month notes nose-dived to 1.74 pc yesterday from 5.11 pc last month. Yield on 10-year notes also fell below 5 pc for the first time in two months. More than ten Italian banks are expected to line up for the loan, sources said.<\/p>\n
However, the jury is still out over whether the banks will use the funds to buy sovereign debts. EMU banks have already cut EMU bond holdings by \u20ac65 billion to meet EU\u2019s core tier one capital ratio of 9 pc. The new liquidity will prevent a Lehman-style collapse at best but will not solve the fundamental problems, they argue.<\/p>\n
GBP\/EURO \u2013 1.1968
\nGBP\/US$ \u2013 1.5704
\nGBP\/CHF \u2013 1.4586
\nGBP\/CAN$ – 1.6081
\nGBP\/AUS$ \u2013 1.5417
\nGBP\/ZAR \u2013 12.7462
\nGBP\/JPY \u2013 122.15
\nGBP\/HKD \u2013 12.2231
\nGBP\/NZD \u2013 2.0256
\nGBP\/SEK \u2013 10.7314<\/p>\n