Currency Update – Tuesday 23rd September

It seems that not everyone in the American government is as socialist as Hank Paulson. The $700bn bail out of the whole financial system is having a rockier time getting through congress than many thought, with different groups wishing to add on their own ideas, and some just objecting to it on ideological grounds. The initial euphoria when the plan was announced has abated, and the problems the plan has faced getting through congress have led to the record rally experienced by many stock exchanges last Friday has started to erode. The rapid restructuring of the financial sector has continued apace, with the last two investment banks left standing, Morgan Stanley and Goldman Sachs, changing their status to ‘bank holding’ companies to allow them to dip into the Fed’s liquidity funding measures. As well as the restructuring within the US industry there has been a shift of financial power away from the US, with the developing nations banks less exposed to the credit crisis, with the Mitsubishi UFJ Financial Group (MUFG) potentially buying a stake in Morgan Stanley.

The effects on the commodity markets have also been to create extreme volatility, with Oil rising back above $120 barrel l, Silver has risen by 8.4%, with Gold and other Industrial base metals also rising. The one constant that has kept up through the recent crisis is the correlation between the oil price and the strength of the Dollar. With Oil rising the Dollar has fallen, allowing the Euro to climb above 1.48 against the Dollar, and the Pound to climb above 1.85.   The Pound has fallen back against the Euro, possibly due to yesterday’s rightmove house price survey showing yet more falls, to below 1.26. Until the start of last week the rising Dollar seemed a one way bet, but the Fed’s solution will massively increased the government debt and is likely to lead to higher inflation in the long term, all of which makes the Dollar rally more problematic.

With all the volatility in the markets recently it is no surprise to see risk appetite also suffer. When times were good, just over a year ago although it seems much longer, and there was plenty of money looking for somewhere to invest, the carry trade was king, which kept the JPY lower and boosted the higher yielding currencies, especially in the antipodes. The change in risk appetite does still effect the Yen, even in the credit crisis, and the reduction has seen the Japanese currency rise pushing the USD/JPY rate down to around Y105, although the Pound has managed to gain some strength holding around about Y195, keeping the rally from last weeks Fed’s actions.

It’s another quiet day on the data front with just the BBA mortgage approvals data, likely to show a further fall, out for the UK. In the Eurozone we have release of the manufacturing and service sector PMI’s. Both are expected to remain weak, possibly indicating a fall into recession in the Eurozone. The US trading hours are likely to be dominated by the travails of the Fed’s $700bn bail out scheme.

Michael Corcoran | Treasury Solutions | nabCapital