The markets were dominated yesterday by the announcement from Treasury secretary Geithner that a possible $1 trillion could be spent on the latest plan to bail out the banks, this time the focus is on removing some of the toxic assets from the bank's books, and using public-private partnerships to achieve this. The taxpayers will take a share of the risk, but also a share of any profits, and the tricky topic of pricing of the assets will be decided by a public auction; of course it may transpire that the auction doesn't actually meet whatever prices the banks think these assets are worth, and some have criticised the lack of detail announced in the plan. Whatever the doubts over the efficacy of the plan, the markets have still taken it positively, and the S&P500 recorded it's largest ever one day climb, over 7%, taking it up by 22% in the last fortnight.
As the markets reacted positively to the news so did commodity prices, with copper rising 3.6%, which in turn has helped the commodity currencies rise, with the AUD breaking out of it's recent range against the Dollar and rising above 0.705, and bringing the Pound below 2.09. The Pound has also benefitted, jumping above 1.08 against the Euro in this morning's trading, and climbing above 1.47 against the Dollar. Although the Pounds recent slide against the Euro was due to the single currency performing better against the USD than did the Pound, the latest climb is more to do with a renewed sense of optimism, with the Pound climbing against both currencies, even as the euro also climbs against the Dollar, up above 1.36.
Once currency that hasn't been helped by the return in optimism is the Yen, the Japanese economy is expected to suffer more than any other developed economy and after strong rises, due to the rapid unwinding of the carry trade, nad so is their currency. The Dollar has climbed upwards above 98 against the Yen, and the Pound has recovered to almost 145. The Japanese economy will take a long time to recover, and the Japanese Yen is still much stronger than it was before the Lehman brothers collapse, but it is likely to see it's currency slowly ebb in strength, whether it will decline fast enough for the economy to recover it's exports any time soon is doubtful.
We've just had the inflation figures for the UK, and they make surprising reading. The broader measure of inflation RPI, which includes mortgage payments, was expected to fall into negative territory, but stayed at 0%, while the narrower definition of inflation, CPI, actually rose on the month and dragged the annual measure back up above 3%, to 3.2%, when the expectation was for a fall to 2.6%. The surprise jump above 3%, mean that the BoE Governor now has to right a letter to the Chancellor explaining why inflation is so high, and after announcing QE measures to combat deflation it could prove embarrassing. King has made a few comments after the CPI rise which make it seem that he doesn't have a clear idea of just why it has risen, saying that the fall of Sterling could be behind it, and that he expects it to continue to fall in the coming months. We will get more details from this morning's testimony by King to the Treasury select Committee.
Sterling has had a muted reaction to the rise, rising towards 1.4750 against the Dollar, and 1.0850 against the Euro.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital