Currency Update – Friday 19th September
No one can ever accuse the Fed of not caring. The collapse of Lehman Brothers and the problems faced by AIG, Merryl Lynch, and HBOS, have ensured that many of the banks that make up the infrastructure of the money markets are unwilling to lend to each other, as they worry that they won’t get the money back, just like when the credit crunch first started. The uncertainty over who will still be trading in a months time has pushed the interbank lending rates sharply higher, not quite to the levels seen over the new year, but still almost 0.5% higher than last week. The sharp rise in money market borrowing was what caused the problems for Northern Rock, so it is perhaps understandable that the central banks have decided to take pre-emptive action to inject some liquidity into the markets, rather than have to bail out yet another struggling bank. The Fed, the ECB, the BoE, and a few other central banks have announced large swap lines to help improve the fluidity in the lending markets, and there was rumours of a US Treasury plan to create a fund to buy the bad housing debt and take it off the banks’ books; moral hazard be damned.
The premptive rescue package has boosted the stock markets with some banking stocks rising by around 25% on this morning’s trading, LLoydsTSB actually took a hammering yesterday, falling over 13%, as the markets assessed what taking over HBOS actually meant, however the overnight news actually saw Lloyds stock rise by 60% in just 5 minutes on this morning’s opening before slipping to a more reasonable rise. The regulatory authorities have taken some other action in the markets yesterday, stopping everyone’s favourite bugbear short selling.
The central banks actions have also had an effect on the currency markets with the renewed optimism giving the Dollar a boost. The GBP/USD rate has declined down below 1.80 overnight, and EUR/USD has fallen to 1.42. GBP/EUR has whipped around in quite a tight range around 1.2650. The renewed optimism has also given some of the higher yielding currencies a boost with the Australian Dollar jumping 2c higher against the Dollar, and GBP/AUD dropping almost 5c to around 2.21.
There is no data out today for either Europe or the US, not that traders have been taking much notice of the economic data anyway this week. Once the recent financial troubles settle down, whenever that may be, then the data from the week may be revisited, and with higher inflation, a surprise rise in retail sales, and the BoE in no mood to cut rates, then, barring any new soft data, the Pound could gain a little support.
Michael Corcoran | Treasury Solutions | nabCapital