YB Currency Update – Friday 8th May

YB Currency Update – Friday 8th May

The Bank of England took the unusual step yesterday of releasing a statement even as they kept interest rates on hold, of course nothing is as usual at the BoE, with interest rates at all time lows, and QE measures being used for the first time. It was the QE measures that necessitated the announcement, as the BoE said that they were adding another GBP50bn onto the, already planned, GBP75bn first tranche. Sterling fell on the news, even though it had rallied strongly in the morning, reaching 1.14 against the Euro briefly before the extra measures brought it down to around 1.12. It is hard to see why the Pound weakened so much after the announcement, back when the BoE first announced QE measures, they said they had been approved two tranches of GBP75bn, but that they may not use the full amount. The statement yesterday was announcing the opening of the 2nd tranche, and is nothing over what had already been assumed, however the markets still reacted and the pound fell. All the factors that were dragging the Pound higher over the past few days, rising equity markets and a general impression that the recession is bottoming out, are still there, so there is no reason Sterling can't quickly regain the ground it has lost yesterday.

The ECB announcement came shortly after the BoE, and they did cut rates has expected, down to 1%, however the QE measures they did announce were not what many in the market had hoped. They announced that they would buy EUR60bn of bonds, but that this wouldn't be paid for by increasing the money supply, something the UK and US have done. The relatively small amount of the purchase and the way it was being funded,  went against some market expectations, and in response the Euro climbed, back above 1.34 against the Dollar, but keeping steady against Sterling. It is now uncertain just how far the ECB are willing to go on the QE measures, when some more bad data comes out; the GDP figures for Q1 2009 are likely to be brutal, then the path may open again for QE.

Over in the US, they didn't have a rate decision, but they did have the results of the stress test for the US banks. The results have caused some considerable worry over the past few weeks, but it seems the regular leaks from the report were accurate, as the market's worst fears went unrealised. 10 of the 19 banks undergoing the test do have to raise extra capital, but they all seem capable of finding it in the market, and the Fed did say that 'nearly all the banks that were evaluated have sufficient tier 1 capital'. The initial jobless claims also was better than expected, raising the prospect of a nice surprise from this afternoon's non-farm payrolls, and reiterating that in spite of the markets reaction to the BoE announcement, which brought it down to around 1.50 against the Dollar, the market conditions are improving for Sterling.

The big event of today is the US non-farm payrolls, due this afternoon, which after the better than expected ADP employment numbers, and lower weekly jobless claims, may actually come in better than expected. The market is looking for a fall of around 600k, which would be an improvement from last month, but may even come in better than that. Of course this still represents half a million less jobs in the US economy, but with the pace of job losses in previous months, this is at least a sign of improvement. If the figures are optimistic, or less pessimistic, then the Pound could recover some of it's poise ahead of the weekend.

No Comments

Post a Comment