Currency Update – Monday 24th November

It’s been a while since the last Sunday bailout of a large bank, but those who thought that the banks who were left standing after the last bout of weakness would prove resilient enough to survive the credit crunch without help, would be surprised by the latest bank struggling to keep it’s head above water. Citigroup is the world’s largest bank, or at least it used to be, but after it’s share price tanked, and yet more write downs were announced, the US government has had to step in to guarantee it’s bad debts and to also inject a reported $20bn of capital into the bank. Late last Friday, before the proposed bail out of Citigroup, the S&P500 jumped by 6.1% after the announcement of Obama’s appointment of a previous head of the NY Fed to the post of Treasury Secretary; however the S&P was still down 8% since the start of the week and as usual lately, bad news, even from America, tends to give the Dollar a boost. Sterling still sits around 1.49 against the Dollar, and any rally above 1.50 seems a difficult proposition.

In Europe the economic news was in line with the recent trend, which means it was terrible. The batch of purchase manager’s indices showed the Eurozone’s private sector falling at it’s fastest level for a decade, This morning we have also had the German IFO survey which was also in line with the recent trend, showing a fall in output levels, with the biggest worry being the expectations level which has fallen to record lows. The weak PMI and IFO surveys have put further pressure on the ECB to cut rates by more than the 50bp, that many expect, however this has not helped the Pound climb against the Euro, and it still sits this week, where it finished the last week hovering around 1.18.

The big economic event of the day is the pre-budget report. This has already been mostly leaked to the Sunday press, so the cut in VAT to 15% will not come as a surprise, neither will details of higher spending, nor an increase in the projections of government borrowing, although that always goes up whether we are in a crisis or not. With public borrowing so high, the government will have to claw back some of it’s money some how, and one proposal is to raise taxes to 45% for those earning more than £150k, which is unfortunately not a problem for most of us, but will not save the governments finances as it is expected to raise about £2bn, while the VAT cut alone will cost around £12bn.

The report is unlikely to have much effect on the Pound, especially as it has already been heavily trailed in the weekend press. The rest of the week is relatively quiet on the UK data front, so it may take an external shock to move Sterling from it’s current range.

Michael Corcoran |Treasury Solutions | nabCapital