At the moment with regard to currencies, no news is good news, and a quiet data front has allowed Sterling to stay relatively strong over the weekend as problems elsewhere have weakened other currencies. The Dollar dipped late on Friday as rumours that the US government would nationalise some US banks weighed on Banking stocks. There were other technical factors for the Dollar's fall, as it failed to break through a trade weighted high, and also failed to make enough headway against the Euro on the back of some poor EU economic data, traders decided that the Dollar rally had probably just about finished so decided to realise profit on their Dollar positions, by selling the US currency. Over the weekend the US government moved to squash the rumours of bank nationalisation, but announced that it may take smaller stakes in some banks, with Citigroup looking like the first candidate. Sterling has managed to hold onto most of Friday's gains, and still sits above 1.45 against the Dollar.
The Euro has been on the back foot for some time now with fundamental problems with a multi-state economy starting to raise their head. The Eurozone may have one currency, and therefore one monetary policy, but with each state raising it's own taxes, and deciding on it's own spending, it has many different fiscal policies. The cracks are beginning to show with the cost of raising funds much higher for some Eurozone countries than others, and Germany have even hinted that they would be willing to support Eurozone nations that are starting to wobble, something they have had to be reminded is against the rules. There was also a series of weak economic data released for the Eurozone with weak service and manufacturing sectors. Sterling has lost a little of it's strength from last week, but has stayed above 1.13 against the single currency, while the Dollar actually pushed the Euro down to a 3 month low, before the late sell off on Friday.
The data trail is light today, and for the UK also for the rest of the week, so it is likely to be a contest between each currencies rescue packages which will determine currency moves, and with the Eurozone failing to provide one overarching policy, the Euro may well continue to suffer with some believing that it may fall prey to the same toxic sentiment as the Pound did last year, and the Dollar the year before that.
There is a little UK news out today with Northern Rock announcing that it will resume large scale lending, after the government asked it to rapidly shrink their mortgage book, something that may have contributed to the collapse in the housing market. Northern Rock are looking to lend roughly GBP14bn, and could go as high as 90% loan to value, which in a market that could fall by over 10% in the coming year, seems quite risky. The extra lending may help sell a few more houses, but with prices falling it is likely to be once people believe the market has bottomed out, before large scale activity kicks back in.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital.