Banks need to clean up their balance sheets

Banks need to clean up their balance sheets

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 16th of July.

EU banks have hit the limit for recap!

Eurozone banks have added EUR 94 billion in buffer capitals since the end of September, thus exceeding the recapitalization limits set by the European Banking Authority, yet falling short of the target. The lenders need to clean up their loan books and hope that governments solve the sovereign crisis soon to gain back market trust.

According to EBA estimates released last autumn, the region’s banks needed a combined EUR 115 billion to hit the 9 percent Tier 1 capital ratio, after marking sovereign bonds to market prices. Eventually stricken banks like Belgium’s Dexia and Spain’s Bankia were excluded from calculations and the remaining banks sailed through the recalculated EUR 76 billion shortfalls before the end-June deadline.

However, the lenders are still locked out of the markets and many are precipitously dependent on the European Central bank for liquidity, due to lack of investor trust in them.

Banks need to clean up their balance sheets first. Bankia’s latest bailout shows how domestic regulators helped lenders to hide toxic assets from public scrutiny. The proposed pan-European banking union can only take wings after such a clean-up act. This will also break up the insidious link between banks and sovereigns and help initiate the joint deposit insurance. However, the EBA may be relegated to the backseat and the ECB may become the new euro-wide bank regulator to bring confidence back.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2712
GBP/US$ – 1.5561
GBP/CHF – 1.5274
GBP/CAN$ – 1.5783
GBP/AUS$ – 1.5206
GBP/ZAR – 12.8434
GBP/JPY – 122.89
GBP/HKD – 12.0532
GBP/NZD – 1.9535
GBP/SEK –  10.9441

EUR: The single-currency tumbled to a fresh low on Friday with the GBP/EUR touching 1.2726, the highest since early November 2008. The latest move by the ECB to cut interest rates and Thursday’s downgrading of Italy by Moody’s also weakened the euro and facilitated the single currency’s new found status of primary funding currency in the FX market. The EUR/USD however marched ahead on the back of a significant short squeeze though fundamentals changed little. The tier-1 economic data calendar from the euro area is light today and market developments are likely to drive the currency’s movement today. The GBP/EUR pair opens at 1.2712 this morning.

USD: The Pound strengthened against the greenback on Friday apparently due to the £80 billion “funding for lending” program announcement  by the Bank of England, which is expected to prop up the struggling UK economy. Another factor for cable’s strength could have been the short covering of EUR/USD by a large EUR interbank purchase report that pushed sterling by over 100 points as EUR shorts scrambled for cover. The GBP/EUR pair touched a high of 1.5580 while the USD index retraced its previous gains as large greenback selling was witnessed on Friday. The economic data calendar for the US is light today even though the Empire manufacturing numbers and US retail sales are likely to attract some attention today. The BoE minutes due for release today will decide the pounds movement. The GBP/USD opens at 1.5545 this morning.

 

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