Currency Update – Wednesday 11th February

After all the waiting and the anticipation over the latest bank rescue plan, it is perhaps no surprise that the markets reacted like a disappointed child once the actual blueprint of the plan proved to be under whelming. The plan was announced yesterday by Treasury Secretary Geithner, and contained a $1trillion public/private fund to buy illiquid assets, and $1trillion program to supply credit to consumers and business; there was also details of a further modest capital injection into those banks that still remain standing. However the markets reacted with disappointment over the lack of details as to how the funds would operate, and how they would value such illiquid assets. US financial stocks fell on the news, dragging the S&P500 down 4.9%, eroding risk appetite, and bringing commodity prices lower. The price of a barrel of oil is now below $40/bbl.

Not even the passage of the economic stimulus plan through the Senate, helped by the votes of a few Republicans, could help salve the market’s mood. As risk appetite retreated, so has the Pound, with investors rushing to place their stocks into safe haven currencies. Sterling has fallen to 1.44 against the Dollar, but has gained some support around here, bouncing back a little on this morning’s trading. The Pound has also suffered due to it’s close correlation to financial stocks, and this has sent it down against the Euro, from almost 1.15, to hover around 1.11.
 
There are a couple of possible bright spots for global economic growth, China was originally expected to help support the global GDP figures, but even this behemoth has started to slow in recent months, there are signs now though that growth in China is starting to stabilise. There is also Obama’s stimulus plan, this has passed both house of congress, and although there is a little horse trading left to do, it should be implemented sooner rather than later. Of course with the disappointment over the bank rescue plan, there is no guarantee that the plan will save the markets, as some expect, but it will help drag the US economy away from it’s worst effects, although at the price of a large, very large, budget deficit.

Sterling may come under even more pressure today as we get the unemployment figures, and the Bank of England’s quarterly inflation report. Firstly the unemployment figures are expected to show an increase in the claimant account of around 90k, which could well take the full figure to above 2m, and the rate of unemployment to 3.9%. The bank’s projections for inflation and growth are unlikely to lift the mood, with GDP likely to be downgraded, with output in the last quarter of 2008 so weak, and all indications that this weakness has continued in to the new year. The inflation projection is more messy, with the VAT cut, and the weakness of Sterling muddying the waters; the outcome is likely to predict inflation falling below the 2% target, which is why the markets expect a clearer picture from the BoE Governor as to whether the BoE are going to cut rates further, or more likely what unconventional measures (i.e. quantitative easing) the bank will be taking.

All in all the Pound could see yet more of it’s recent gains eroded today.

Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital