Good morning and welcome to today\u2019s foreign exchange market commentary on Tuesday the 20th of December.<\/p>\n
Yesterday\u2019s Long Term Refinance Operation (LTRO) conducted by the European Central Bank got an overwhelming response from the EU member-country banks. By the end of the day, 523 banks borrowed \u20ac498 billion, which works out at \u20ac935 million on an average per bank. The market euphoria that followed proved to be short-lived as economists realised that though an imminent credit crunch has been averted, the sovereign debt crisis remains far from over.<\/p>\n
The fresh cash injection of near half-trillion Euros, initially hailed as \u2018game changer\u2019, is hardly new money. An estimate by RBS showed nearly 61 pc or \u20ac298.5 billion has been recycled from the ECB\u2019s existing or maturing operations this week and fresh liquidity stands at about \u20ac191 billion.<\/p>\n
Analysts are divided over the effect of new money on the system. Sceptics point out if banks are to conform to the new Tier 1 capital requirement of 9 per cent, they would need to raise \u20ac2.5 trillion by next June. Another \u20ac230 billion of bonds will mature by the first quarter of 2012, putting additional stress on cash. As a result, banks are desperately cutting risky assets on their books to avoid raising fresh capital. Those not exposed to risky sovereign debts are unlikely to start buying them any time soon. Thus the LTRO is unlikely to solve the sovereign debt crisis it was intended to do. Furthermore, even if the money flows to the government coffers, they will fall well-short of the actual requirements.<\/p>\n
To begin with, Borsa Italiana announced 14 Italian banks have committed to government-backed securities worth \u20ac40 billion for ECB collateral. The new move will reinforce the bank-state nexus rather than weakening it, RBS observed. However Italy, whose GDP shrunk by 0.2 per cent in Q3 and may continue to do so as tough new austerity measures come into effect, may be saved from its fifth recession since 2001 with the ECB\u2019s latest move. The next round of LTRO is due in February.<\/p>\n
GBP\/EURO \u2013 1.2002
\nGBP\/US$ \u2013 1.5674
\nGBP\/CHF \u2013 1.4665
\nGBP\/CAN$ – 1.6094
\nGBP\/AUS$ \u2013 1.5530
\nGBP\/ZAR \u2013 12.8982
\nGBP\/JPY \u2013 122.45
\nGBP\/HKD \u2013 12.8982
\nGBP\/NZD \u2013 2.0375
\nGBP\/SEK \u2013 10.7814<\/p>\n