Analysis

30th June 2010

 

 

Sterling / Euro

 

Sterling hit a fresh 19-month high against the euro yesterday, continuing its rally as investors grew cautious ahead of scheduled bank repayments to the ECB this week.

• The single currency remained under pressure with the market fearful about how the end of the ECB's 12-month loans may impact the funding situation in Southern Europe.
• The cost of insuring against a default in Spanish government debt hovered near a record high and interbank lending rates soared to their highest levels since September as uncertainty about the prospects for the eurozone's economic recovery builds.
• In the UK, there was limited market reaction to official data showing British mortgage approvals were unexpectedly flat on the month in May, though net mortgage lending grew faster than expected, helping the pound climb to 1.2350.
• In trading this morning, sterling has come off its highs following disappointing figures from the UK housing sector as well as a report in the Guardian that Osborne's Budget could cost up to 1.3m jobs over five years.
• However, the price remains above 1.23 and the pound has further upside potential in the coming days with confidence deserting the single currency ahead of the expiry of the ECB's 12-month tender.

 

 

Sterling / US Dollar

 

The pound fell from a seven-week high against the dollar, dropping back below $1.51 as fears of a double-dip recession resurfaced.

• Confidence in the strength of the global recovery took a knock yesterday as fears about the stability of the eurozone hit the headlines.
• The US dollar was broadly stronger as investors pulled back from riskier assets and equity markets around the globe went spiraling lower.
• The FTSE crashed by 3.1%, closing at its lowest level in ten months and only the second time it has closed below 5000 this year.
• Similarly, the Dow Jones dropped 2.7% to close back below the important 10,000 level.
• In trading this morning the trend remains little changed, though sterling is only trading marginally lower with the price holding around 1.5050.
• While doubts about the global recovery are playing out, the rush towards safe-haven currencies may prove to be short lived once quarter-end hedging has dried up.
• At present though, we do not anticipate sterling to rally too much higher ahead of Friday's US employment figures.

 

 

Euro / US Dollar

 

The single currency continued to slide against the US dollar yesterday, slipping back below $1.22 as worries over the health of the eurozone financial system escalated.

• Sentiment towards the single currency soured as investors awaited the expiry of a big financing programme from the European Central Bank.
• Eurozone banks are due to repay €442 billion worth of 12-month loans, which they borrowed at low rates as part of the ECB's efforts to boost liquidity.
• Declines accelerated after a report showed a steep fall in US consumer confidence in June. Worries came from the labour market, which has been one of the weakest areas of the US economic recovery.
• The focus today will now be on the three-month loans that the ECB are due to offer. The level of demand for the loans should give a good indicator of the current funding situation at European banks.
• This morning, the euro has capped it losses, creeping back over $1.22 but the near term outlook for the currency remains negative

 

 

Rest of the World

 

Australian Dollar

 

In a volatile day in the markets, the pound rallied over four cents against the aussie as investors shed their exposure to riskier assets.

• Global markets slumped yesterday as concerns grew surrounding the eurozone's financing troubles. This was compounded by disappointing news from Asia, which, along with a plunge in US consumer confidence, raised fears over the pace of the global economic recovery.
• The yen, and US dollar, were the main beneficiaries of the rising levels of risk aversion but the sell-off in commodity-linked currencies also enabled sterling to gain over two percent.
• This morning the aussie is regaining some of the ground that it lost as the market rebalances following the steep drop and as a monthly Nationwide survey shows UK housing prices rising at a slower pace than expected.
• Currently the pound is trading just over a cent down on the day with the price holding around 1.76, though we expect that the pound has further to climb over the short term.

 

 

New Zealand Dollar

 

In a similar move to sterling/aussie, the pound rallied strongly against the kiwi dollar yesterday amid a broad sell-off in risky assets.

• Sterling climbed over two percent as the markets grew wary of the funding troubles in Southern Europe and the risks that they pose to the stability of the global recovery.
• With month-end and quarter-end flows dominating, trading volumes are quite low, which has exacerbated price movements and the kiwi has capped its losses this morning.
• In a statement today, the New Zealand Central Bank reaffirmed their desire to gradually remove stimulus measures, but they also said that global conditions would dictate the pace at which policy is tightened.
• Amid the current risk adverse environment we expect that the kiwi could continue to lose ground, with any talk of further interest rate rises from the RBNZ unable to offset the bearish market sentiment.

 

 

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