Currency Update – Thursday 25th September

The fight to get the Troubled Asset Recovery Program (TARP) through congress continues, with lame duck President Bush weighing in with an address to the nation, stating that unless the bill is passed “ultimately, our country could experience a long and painful recession”. Both parties in congress have problems with the bill, some wanting a stake in the equities of the companies from whom the state will be buying bad debt, and others who want more congressional oversight of the use of public funds. Bush did acknowledge that he didn’t like using public funds to bail out bad investments, but believed that the Government was uniquely placed to buy these dubious debts while the market price was low, and help the system, and then sell them back once the market recovers; a tactic that could work as long as anyone will want to buy them back, and the default rate stays within reasonable boundaries.

While the TARP battle goes on, the currency markets watches from the sidelines. The Pound still sits roughly level with the Euro, at around 1.26, in spite of a weak German IFO survey that showed a drop for the third straight month, and pointed to Germany now heading for a recession. Traders have even started pricing in rate cuts from the ECB, with a 23% chance of a cut next week. Given the scale of the crisis, and the bail out plan in the US, discussing rate cuts from the ECB, BOE seems petty, and one fear is that when the US do act, the other central banks will think that the US has done enough to shore up growth, and they can concentrate on inflation, keeping rates higher. The Dollar has weakened a bit overnight allowing the Pound to climb back to around 1.86, and the Euro to hover near 1.47.

The signs are that the US Government are going to do something, even if it is a watered down version of TARP, and this has helped ease worries generally allowing some risk appetite to enter into the market. The AUD has benefited from risk appetite and the carry trade in the past, and it looks like it might benefit again. The IMF have also helped out, reporting that Australia has a ‘sound macro-economic framework’, and the Australian Dollar was ‘now broadly in line with medium-term fundamentals.’ The AUD has climbed over 1% against the Yen, and the Pound has fallen to around 2.22 against the Aussie Dollar.

There’s no UK data out today, although in the current environment it doesn’t have much effect anyway. There is a speech by MPC member Kate Barker which could give some insight into next weeks rate decision, although Barker is unlikely to give any clear signals. Once again the markets are likely to be watching and waiting to see how the TARP plan progresses through congress, it has already turned from a 4 page bill to a 40 page bill.

Michael Corcoran | Treasury Solutions | nabCapital