Currency Update – Thursday 18th September

There’s been a strong correlation between struggling football clubs and their struggling sponsors: first the debacle up in Newcastle seemed to be preceded by the collapse in Northern Rock, then West Ham who have recently lost their manager are backed by the collapsed travel company XL, and Man U’s lacklustre start to the season, even being deservedly beaten by their hated local rivals, has coincided with AIG’s woes. I’m not sure if HBOS currently sponsor a team, but if they do that team should be worried. An extremely volatile day for HBOS shares yesterday has ended with Lloyds TSB buying the bank at a knockdown rate, even though the government have came out and backed the HBOS business model. At least this particularly takeover is a decidedly capitalist one without the need for a government intervention, apart from to ease the takeover through the monopolies and mergers commission.

While the UK was focused on HBOS’ problems, the financial meltdown in the US continued with JP Morgan now under a bit of pressure. With the markets in such turmoil those who are still willing to invest are looking for the usual safe havens, the Dollar is out so Gold has had it’s best one day rise in 10 years, rising 11.4%, and despite a slight downgrading of the credit rating of the US government, they have taken on a lot of debt recently; US treasury bills are still highly in demand, indeed at some point yesterday they were even trading with a negative interest, meaning that investors were paying the US government to take their money.

The problems in the US have hurt the Dollar allowing the Pound to climb above 1.81, and has high as 1.8250 on trading overnight, although the rate has been sliding since the opening of UK trading hours. The Dollar has also weakened against the Euro, as the single currency has climbed back above 1.43. Yesterday’s MPC minutes have given the Pound a bit of support as the 8-1 vote to keep rates on hold has contradicted many peoples thoughts that rates were due to come down some time soon. The Pound has also climbed against the Euro, climbing above 1.27 overnight before dropping back down again towards 1.26.

The sell off on the stock markets continued in the Asian markets this morning, Hang Send fell by 5%, but there are signs that European exchanges may at least be catching breath before a further move downwards. Central bank’s have started a coordinated move to try to ease liquidity in the money markets, with interbank lending rates once again rising, putting pressure on those banks that rely on the wholesale money markets for their funding. Once again away from the markets, the ‘real’ economy was expected to have some more bad news from the retail sales figures with a 1% downturn expected, but the release has surprised the markets showing a 1.2% rise from the previous month. The growth has been driven by clothing and footwear, maybe the gloomy weather wasn’t all bad news, and has boosted the Pound sending it back towards 1.82 against the Dollar.

Michael Corcoran – Assistant Manager |Treasury Solutions | nabCapital™