YB FX Daily Report – 26th March 2009
The Pound has slipped back on the markets, losing some of it’s gains over the last few days, but not all. As mentioned yesterday the actions and comments from central banks and governments are having big effects on the market; one day after Governor King indicated that he thought there would be no more money for a 2nd stimulus plan, and that government borrowing had already reached it’s limit (comments which dominated Prime minister’s question time, although it was the 2nd in commands who argued over it as Gordon was out trying to rally support ahead of next weeks G20 meeting), the governments gilt auction failed to sell all the gilts on offer. This has been used to attack the government’s increased borrowing, however the gilts auctioned yesterday were very long term, while the gilts the government are buying back are for shorter terms, making the longer term gilts less attractive. The markets have still reacted to the failed auction, and a greater drop in the CBI distributive trades survey than expected, bringing the Pound back below 1.08 against the Euro, and even back down to 1.07 overnight, before bouncing back.
Across the pond it was also comments from government officials that were causing market volatility, this time it was the much maligned Geithner, already under pressure due to the AIG bonus scandal, who indicated that the US would be open to Chinese proposal for the world to use the IMF’s special drawing rights (SDR) as a reserve currency. SDR is a super-sovereign reserve currency, whose value is based upon the movements of a basket of currencies, with a more even split than the currency reserves of most nations ( SDR is USD 44%, EUR 34%, JPY 11%, GBP 11% compared to USD 65%, 25% EUR, and less than 5% GBP). If the world were to switch to SDR as a reserve currency then the change in proportion would sink the USD, while boosting the JPY and the GBP, although of course it wouldn’t happen overnight. The markets reacted to the headline comment, sending the Dollar tumbling before Geithner managed to clarify his comments saying that he hadn’t studied the Chinese proposal, and that Obama and himself, both saw the Dollar as the worlds dominant reserve currency. The Dollar did stabilise after his clarification, but the Pound still stayed lower below 1.46, while the Euro managed to keep it’s gains holding above 1.3550 against the USD.
The UK receives retail sales data today and it is expected to show a 0.4% fall, with the possibility of an even larger drop, although on-line sales may provide some cushion to this. Over in the US this afternoon we have a final estimate of Q4 GDP, and the market is expecting an even bigger down grading to the already terrible -6.2% estimate, possibly down to -6.6%.
The retail sales may provide some risks to Sterling’s recovery, but as the market is already expecting bad figures, any fall will probably be taken relatively calmly unless it is much more than expected, while US GDP figures will also be largely accepted by the market, unless there is a significant further downgrading of even more than expectations. The markets are likely to continue to trade on current sentiment, which should give the Pound some support, and if today’s gilt auction, with more desirable maturity dates, goes as planned it may help relieve some traders worries over the state of UK public funding.
Michael Corcoran – Treasury Partner | Treasury Solutions | nabCapital