Sterling has fallen yesterday, even against the weakening Yen, as a number of different factors and comments aligned to drag the UK currency lower. The problems in the banking system haven't helped as RBS are poised to announce record losses for a UK corporation, the UK government is expected to announce details of an asset protection scheme, which could put the already beleaguered taxpayer GBP1,300bn further into debt. Our European brothers and sisters have not helped, with a document released before this months G7 meeting announcing that the fall of the Pound 'raises questions about the financial stability of the British economy'. The actual hard data released yesterday was mildly Sterling negative as GDP figures for Q4 2008 were left unchanged, even as Q3 figures were revised slightly lower, but along with the government comments and actions, the Pound slipped down to below 1.12 against the Euro, and to around 1.42 against the Dollar.
Stocks and shares rose in America after the markets decided that the banks would survive the government's stress test, however this rise couldn't erase the previous dip as Obama's speech to both houses of congress offered no news details on any of his many rescue schemes. The government said that there was no limit to the capital that any bank that survived the stress test could count on the treasury to provide, although you would expect those banks that did survive to not need much further capital. The Dollar advanced even though existing home sales dropped by over 5%, and managed to force the Euro down to below 1.28 as German GDP was kept unrevised at -1.7% compared to the past year.
The breakdown in the relationship between the Yen and risk appetite isn't the only change in the FX markets recently, the Australian Dollar, normally has a inverse relationship to Yen movements, but it has also changed it's behaviour. The AUD still rises along with optimism, normally measured by equity markets, but the correlation is much weaker, as can be seen when US stocks started falling yesterday and the Aussie Dollar held up much better than other major currencies. The Australian economy is suffering much less than other developed nations, whereas the Eurozone and the UK are dropping by 1.5%qoq, Japan by 3.3%, the Australian economy is expected to remain flat. The relative strength of the Aussie economy is keeping the GBP/AUD down below 2.20, and keeping the AUD up around 0.65 against the USD.
We've had a nationwide house price survey today, showing a further fall, and taking the yearly decline down to 17.6%, this seems to contradict other surveys which showed a small rise in house prices in January, but is in line with other evidence, and expectations, that house prices have further to fall. Later today we get the usual month end surveys from the Eurozone, and with the markets expecting sentiment to be stable from last month, there is room for disappointment with the general data coming out of the Eurozone being so dismal. With sentiment on the Pound seemingly negative, it is uncertain how much benefit Sterling can take from any Euro weakness.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital.