Currency Update – Tuesday 7th October
The carnage continues as stock markets dip globally, the Dow Jones fell below 10,000 for the first time since 2004, the FTSE posted it’s largest ever one day fall of 7.9%, while European stocks also suffered, the French CAC40 posting it’s 2nd largest one day fall and the German DAX closing 7.1% lower. There was no specific trigger for yesterday’s slide, instead it seems the chaotic response to the ongoing crisis, by the central banks and governments has led to yet more uncertainty. The EU may be a single economic zone, and all the economies in the Eurozone share a currency and a central bank, but the response to the crisis has been anything but coordinated, the first to break rank was Ireland, guaranteeing all bank deposits, Greece tried to follow suit, and rumours that Germany were also going to do the same, since denied, created even more confusion. EU Finance ministers meet today, and if they can thrash out a shared response, it may reassure the markets that they do at least understand the problem.
One thing that many in the markets are hoping for is a coordinated rate cut across the board. The Reserve Bank of Australia have led the way cutting their lending rate by a shocking 1%, the largest cut since 1992. The cut had the desired effects as the Australian stock markets bucked the worldwide trend actually closing higher than it opened. Australian markets were closed on Monday, and the AUD had a very volatile start to the week as investor appetite collapsed, it fell over 5c against the USD, and the 1% rate cut has actually lent the currency a bit of support, as Monday’s moves are seen as being an overreaction to market instability, as the AUD bounced back above 0.73. The weakness in the AUD has allowed the Pound to climb upwards breaking above 2.40 in this morning’s trading.
The Pound itself had a volatile day yesterday, with the most volatile period coming around the Chancellors speech in Parliament, it may be that some expected an announcement of action from the speech, but if so these expectations were misplaced, and the Pound suffered dropping down below 1.74 against the Dollar, and below 1.2850, against the Euro before bouncing back. As the financial infrastructure starts to crumble, investors have been seeking the historic safe havens for their investments, which has benefited the US Dollar, and Gold, but weighed heavily on Oil, now down to below $90/bbl, and industrial metal prices hitting 2 year lows.
It’s another quiet day on the data front, however trader’s attention will be closely focused on the stock market and any hints at actions from government. In the UK we can ponder as to whether the MPC will be following the RBA lead in cutting rates in response to the crisis, even though inflation as yet to come down anywhere near the BoE target; certainly those calling for 50bp cuts on Thursday now seem less wild in the light of the RBA’s action.
Michael Corcoran | Treasury Solutions | nabCapital