Analysis

21st July 2010

 

 

Sterling / Euro

 

Sterling rallied after hitting a 9 week low against the single currency, to close up 80 points.

• Sterling had fallen early in the session yesterday after a sharp rise in the UK's public sector borrowing requirement figure.
• However, sterling made a comeback later in the session as the euro fell from its artificially inflated high as traders looked to profit-take ahead of the results from stress tests on European banks, due to be released on Friday.
• Once traders closed out their short positions after lunch on Tuesday, the euro had a correction downwards of almost two hundred points.
• The rate of decline accelerated after demand was low for Hungary's three month Treasury bills.
• Sterling is marginally down this morning as the market awaits the publication of the minutes from the last MPC meeting, where the Bank of England decided to keep the UK's interest at 0.5% earlier this month.
• With the most likely outcome of the minutes being Andrew Sentence standing alone in the vote for a rise in interest rates again, this could have little impact.

 

 

Sterling / US Dollar

 

Sterling fell to low of 1.5155 against the greenback before recovering to close at 1.5261.

• Sterling was sent broadly lower yesterday morning as market confidence in the UK's recovery took a knock after a poor PSBR result.
• Sterling seemed to track the dollar's rise against the euro yesterday and rose even higher to end the day up 40 points, completing a swing of one cent from the session's low.
• Sterling is trading flat this morning as investors seem pensive about the MPC minutes due to be published this morning.
• If the minutes reveal that a second member of the MPC joined Andrew Sentence in calling for a rise in interest rates, we could see some very positive sentiment towards sterling.
• Fed Chairman, Bernanke is also due to give the first of two speeches on monetary policy this evening, although the second part of the speech, on Thursday, is likely to be the market mover.

 

 

Euro / US Dollar

 

In a rollercoaster day of trading between these two, the US dollar won out as traders look to have finished profit-taking and the euro was allowed to depreciate to a more sustainable level.

• The euro fell from more than a two month high against the US dollar on Tuesday as tumbling equity prices hit risk appetite, prompting investors to book profits ahead of Friday's stress test results.
• The dollar has slipped slightly this morning, currently trading just below the 1.29 level. We could see this pair return to the 1.26 level relatively quickly given the short-lived nature of the euro's rise.
• Weakness revealed in some of the 91 European banks stress test results could have a detrimental effect on the euro as debt crisis fears return.
• A report out this morning stated that the US economy will not suffer from a 'double dip' as investors will regain their risk appetite in the third quarter. This could put downward pressure on the US dollar and we could see global currencies rise against it as a result.

 

 

Rest of the World

 

Australian Dollar

 

A move towards riskier assets allowed the Australian dollar to rise 2.5 cents, while this morning has been tame with investors awaiting Fed chairman Ben Bernanke's testimony on the US economy.

• With equity markets up on Tuesday, investors moved into riskier currencies and the aussie dollar was a prime benefactor. The Australian dollar has a very close correlation with equity markets and risk sentiment, which provide impetus for investing in the riskier currencies.
• Trading has been slow this morning with investors awaiting the Fed chairman's views on the growth of the US economy and the global economic recovery.
• The expectation is of a dovish speech, and the markets are pricing in a sombre report from the chairman. That being said, any positives from the testimony are likely to provide a boost to the aussie in the near term.
• Currently the aussie is hovering just below 1.73 mark.
• With the chairman's speech tonight, tomorrow night will provide a more candid view on Mr. Bernanke's thoughts as an unscripted Question and Answer period will provide more volatility in the market.

 

 

 

New Zealand Dollar

 

The pound lost nearly 3 cents to the kiwi as investors rode a wave of strong equity markets, while this morning has seen a sluggish market with traders awaiting Ben Bernanke's global outlook.

• With global equities up and bond yields widening, the kiwi had a strong day as investors continue to look for the positive markets in what has been a recent glut of poor results across most major currencies.
• This morning has seen slow trading with the kiwi holding near yesterday's close of 2.129. This is due to investors awaiting reports from Ben Bernanke and the MPC in the UK.
• The fed's report is a biannual review of monetary policy and is done over two days. The second is the most important part due to an unscripted question and answer session.

 

 

 

 

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