Currency Update – Wednesday 15th October
Whatever the UK can do the US can do better, or if not better, then at least bigger. After the UK announced it’s large banking takeover, the US has upped the ante by buying $250bn worth of US banking stocks, taking a share in Citigroup, Wells Fargo, JPMorgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, and Goldman Sachs. With all of the leading banks now partly owned by the US government you could expect the stock markets to react as they did when the UK bail out was announced, however Americans are much more suspicious of state interference, and although the markets initially rallied, climbing 4%, they then dropped back to finish 0.5% down, with even Hank Paulson expressing distaste for the Government’s action, although admitting that it was necessary.
The Asian markets followed America’s lead, dipping slightly, as after two days of strong rises some traders sought to take profit. As some confidence floods back into the financial sector, the focus has started to return to the ‘real’ economy, and we are still at risk of heading into a global recession. The news from the UK yesterday showed house price falls continuing with a 2.7% monthly decline, the largest since the record began, and the CPI measure of inflation hitting 5.2%. However this large increase in inflation, from 4.7% last month, is driven by the latest utility bill rises, while the price of food has actually dropped, which points to this being the peak. With inflation likely to come down over the coming months, and maybe even below target with 1 year, the MPC, who try to target inflation with a 2 year horizon, will start to aggressively cut rates, with the base rate possibly below 4% by the end of the year.
Sterling has remained relatively steady throughout yesterday, steady that is compared to recent weeks, although it has dropped back down towards 1.74 against the Dollar, and is hovering around 1.28 against the Euro. There is some signs that the latest cycle of the credit crunch may be easing as Libor rates finally start to ease, US Dollar Libor fell, and so has GBP Libor, albeit at a very small easing; however the renewed focus on the global slowdown, plus some small stock market falls, have hurt risk appetite, weakening the AUD, which still sits around 2.50 against the Pound.
Today we can get back to focusing on the UK economy, and the data isn’t likely to be good. We shortly get the latest unemployment figures, which rose by 35k last month, and a similar rise this month is expected, although a larger fall could see Sterling suffer as the UK economy slips faster than expected. One benefit of unemployment, for the economy if not for paid employees, is that it eases wage pressure, which should stop the recent rise in inflation feeding through to 2nd round effects.
We also get a 2nd estimate of Eurozone CPI which is expected to confirm the fall to 3.6%, which should allow the ECB to think about further rate cuts in the near future.
As an indication of just how large the central bank’s bail out actions are in Europe, there are 100 billion stars in the galaxy, but the European governments have spent €1,800bn trying to recapitalise the banking sector, as the late physicist Richard Feynman said “we used to call them astronomical numbers, now we should call them economical numbers”.
Michael Corcoran | Treasury Solutions | nabCapital