CURRENCY UPDATE – Tuesday 22nd April 2008

CURRENCY UPDATE – Tuesday 22nd April 2008

 The Pound fell heavily yesterday as the details of the, heavily trailed, Special Liquidity Scheme, failed to excite the markets. Many of the details of the scheme were already known before they were announced by the central bank, and with a bit of time to digest the ramifications it seems the markets have decided that last week movements were an overreaction. The BoE have been insistent that these moves are not intended to sustain the housing bubble, but to ease liquidity in the banking system. This is a view that many of the papers agree with, calling the scheme a bail out of the banks, something the Treasury is quick to deny, pointing out that the risks of the bank's mortgage backed securities will still stick with the banks. This does raise the moral hazard issue, over whether the BoE should bail banks out of their bad investments, with RBS perhaps taking the more responsible option in asking their shareholders to raise capital for the bank, announcing today details of a 12bn rights issue.

Sterling dropped like a stone yesterday as the markets corrected last weeks moves, falling to around 1.2450 against the Euro, and to around 1.9750 against the Dollar. The fall against the Dollar came in spite of drops in US sentiment caused by weaker than expected results from the Bank of America, dragging down US equities and allowing the Euro to climb back up towards 1.5920 against the USD.

Over at the other side of the world producer price inflation results came in twice as high as expectations, almost doubling the annual rate, and reduced expectations for rate cuts. Some now see risks in tomorrow's CPI data, although has we've seen in the UK, PPI data can take a while to feed through to the high street. The Aussie dollar has been boosted by further increases in commodity prices over the past few weeks, and has climbed on inflationary fears above 0.94 against the US Dollar, and has pushed Sterling down to around 2.10 against the AUD.

We still have to wait until tomorrow to get any UK news, so today will be dominated by news across the Atlantic, as the Bank of Canada are expected to cut rates by 0.5%, US existing home sales which are expected to fall again, and a manufacturing index which is expected to show a slowing of output after last months surprise rise. With the sentiment on the US economy recovering in recent weeks, a string of bad data may cause some uncertainty and could put the Dollar under some pressure.

Michael Corcoran - Assistant Manager |Treasury Solutions | nabCapital | A division of National Australia Bank Limited

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