Analysis

1st July 2010

 

 

Sterling / Euro

 

The pound slipped back quite sharply against a stronger euro yesterday following news that eurozone banks borrowed less-than-expected from the ECB.

• The ECB announced that 171 banks borrowed a total of €131.9 billion in three-month loans, well below expectations of €210 billion.
• The amount is still the highest ever borrowed in a three-month period but pales beside the €442 billion of 12-month loans which banks must repay to the ECB today.
• The euro was also supported due to end of quarter and end of month flows, which saw investors buying back the currency to square positions.
• Comments from Bank of England policymaker Adam Posen that the economy may still fall back into recession also weighed on the pound, though last-minute rebalancing flows were likely the main factor driving the pound's losses.
• In trading this morning, the price has held relatively unchanged, hovering around €1.22.
• The euro's rally may prove to be short-lived on the view that it still carries a higher risk premium over sterling due to the concerns about the eurozone banking sector and debt problems.
• In terms of data, a monthly measure of UK manufacturing activity is released today though it is unlikely to have too much impact with market focus still centered on the ECB, which today is issuing six-day loans.

 

 

Sterling / US Dollar

 

Sterling continued to lose ground to the US dollar yesterday, dropping steadily back below $1.50 as the level of risk aversion favoured the safer currency.

• The pound opened on the back foot after the Nationwide building society revealed data showing UK house prices rose just 0.1% on the month in June, reinforcing doubts about the strength of recovery in the sector.
• Selling pressure continued after BoE policymaker Adam Posen underlined the fragility of the UK economy, offsetting comments from a fellow policymaker who earlier in the week spoke of the need to start raising interest rates.
• In trading this morning the pound's downward trend remains intact, with the price now back below $1.49.
• Disappointing data from the US yesterday raised concerns about the employment figures due tomorrow, which has added to an already risk adverse market.
• Having been unable to sustain its push through $1.50, we expect that the pound could now hover below that level in the near term with the dollar looking set to remain in demand.

 

 

Euro / US Dollar

 

In line with its broad market gains the single currency edged higher against the US dollar yesterday, supported by quarter and month-end inflows.

• The euro pushed higher on speculation of European sovereign demand for the currency at the end of June, which also marked the end of the second quarter and half-year.
• The single currency also found support after weaker-than-expected demand for a three-month allotment of European Central Bank funds, which eased some concerns about the finances of eurozone banks.
• The demand for the three-month loans was a good test of the current health of Europe's banking system and it was an encouraging sign that European banks did not need as much liquidity as previously thought.
• The gains were limited though with the credit agencies still lurking and Moody's saying yesterday that it may cut Spain's sovereign debt rating on deteriorating economic growth prospects.
• In trading this morning the price remains hovering just above $1.22 and with the key US figures due tomorrow we expect little movement on the day.

 

 

Rest of the World

 

Australian Dollar

 

After initially dropping back quite sharply in the early session, the pound recovered to close marginally higher against the aussie.

• The continuing slide in global equity prices kept risk aversion at a high, with investors shedding their exposure to the higher-yielding aussie.
• In trading this morning market sentiment remains unchanged following a surprise fall in Chinese manufacturing activity, triggering fears that economic growth in China is slowing.
• At present we are not expecting any sudden pick up in risk appetite. Disappointing data from the US yesterday cast a shadow over Friday's US employment data and with an upcoming long weekend in the US, traders are likely to refrain from taking risky positions.
• Sterling is trading another half cent higher today with the price heading towards 1.79 and a one-month high.

 

 

New Zealand Dollar

 

Sterling gained against the kiwi dollar for the fifth consecutive day yesterday, pushing above 2.18 as investors squared positions into the month-end.

• The risk-off scenario putting heavily selling pressure on the New Zealand dollar was compounded yesterday as investors squared positions going into the second half of the year.
• Weaker-than-expected Chinese data this morning has added to the risk adverse climate, sparking further selling in higher-yielding currencies.
• A report also showed that New Zealand commodity prices eased from record highs in June, the first fall in a year, with weaker dairy prices driving the dip.
• At present the price is heading toward 2.19 and we expect there could be further mileage to the rally in the near term.

 

 

 

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