The global financial panic continues, as even the guru of the modern capitalist system in the US, Alan Greenspan, admitting that the assumptions he made, while in charge, as to how the markets worked were incorrect. Hank Paulson was also admitting culpability, saying that 'I could have seen the sub-prime crisis coming earlier', although as he also said 'I'm not saying I would have done anything differently' then it's hard to know what he is actually admitting to. The news coming out of the American economy is on the bleak side, with the prospects of job cuts by major companies such as General Motors, Xerox, and of course Goldman Sachs. The developing economies have continued to suffer with Russia's credit rating being downgraded, Brazil and Mexico having to intervene to prop up their currencies, and South Korea's equity markets down 7.48%.
With all the bad news around the world, at least Sterling isn't alone in its woes, and its problems have got worse; as investors continue to unwind investments returning their capital into Dollars, the US Dollar has been rising, and the Pound has been falling. The GBP/USD rate is now at an amazing 1.5850, unthinkable just a few weeks ago, we started the month near 1.85, even this week started at near 1.76. The Pound has also slipped against the Euro, although much more moderately falling down to around 1.25, while the Euro has slipped down to around 1.2650 against the Dollar.
Another beneficiary of the investment unwinding has been the Japanese Yen. As the markets entered this period short of both the Yen and the Dollar, the unwinding has meant that both of these currencies have benefited. The Yen has climbed against the Pound forcing the GBP/JPY rate down to around JPY151, which represents a huge fall from August when the rate was JPY215. The Yen's rise against the Australian Dollar, usually a good indication of risk appetite as the currencies are on opposite sides of carry trades, is even more dramatic; At the start of August the rate was 102 Yen to the Aussie Dollar, now one dollar will only buy you 60 yen.
The bad week is unlikely to get any better for the poor Pound as today's Q3 GDP figures are expected to be the first step for the UK economy to head into a technical recession, and could be the end of the 64 quarters of growth the UK has enjoyed. This is likely to keep Sterling on the backfoot throughout the day. Just as the price of petrol starts to ease, there is also an OPEC meeting in Vienna, with the price of oil dropping by more than 50% as global growth drops, the oil producing companies will be attempting to defend their price, by essentially operating a oligopoly. Whether the group has the cohesion, or leverage to fight the falling price will be seen in the coming weeks and months.
Michael Corcoran| Treasury Solutions | nabCapital