Currency Update – Tuesday 21st October

There are some tentative signs that the interbank money markets are finally starting to return to normal, an important sign for the easing of the credit crunch. Sterling interbank rate have been slowly ticking downwards, although they still remain a long way above the newly lowered base rate, and the US Dollar interbank rate has started dropping significantly, although again with the Fed funds rate at 1.5%, the interbank rate is still extraordinarily high. There are some signs of increased activity in the commercial paper market, an important source of credit for companies, although this is still having to be supported by the US federal government.

Although there are signs of the financial sector slowly recovering some poise, helped by another round of announcements of bail outs from governments, this time from smaller players such as Holland and South Korea,  yesterday’s downgrading of GDP growth in China should be a reminder that the broader global economy is also in trouble. This is something that Bernanke mentioned to congress, admitting that the ‘economy is likely to be weak for several quarters with some risk of a protracted slowdown.’. Somewhat paradoxically the US Stock markets rallied after his speech, probably due to the fact that everyone already knew that the economy was in trouble, but now they can expect another wave of government spending, form the supposedly free market US state, to give the economy some support.

As the US markets rallied so has the Dollar, forcing Sterling down from near 1.75 to around 1.71, the Euro has also fallen against the Dollar below 1.33, although the GBP/EUR rate has stayed steady hovering around 1.29. The reasons for the slump in the Pound and Euro against the Dollar is hard to pick, it could be due to worries about the European banking sector, with European interbank rates coming down more slowly than US rates.

It’s a quiet day today with just the CBI Industrial Trends survey released for the UK, this is expected to trend even lower than the last reading, which is unlikely to brighten up the Pounds prospects. With Public Sector borrowing reaching a 60 year high yesterday, this morning’s news that 1 in 4 corporations manage to pay no corporation tax at all will be galling to many, however when the vast majority of the corporation tax revenue is paid by the companies that comprise the media’s latest bogeymen: Banks, Insurance, Oil and Gas companies, it is no surprise that the Government is not letting their biggest tax payers fail.

Michael Corcoran | Treasury Solutions | nabCapital