YB FX Daily Report – 2nd June 2009

YB FX Daily Report – 2nd June 2009

Despite the 11-digit figures, the announcement yesterday of the latest government bailout seemed largely to go unnoticed by the markets. Either this was simply seen as an end to a saga that has been played out in the financial press for weeks, or $50,000,000,000 just doesn't cut it these days. The US government yesterday confirmed that it will be pumping an additional $30bn into General Motors, having already given aid to the tune of $20bn in recent months, and this time taking a 60% stake in the company. With even a cursory look, it is hard not to see GM as the sort of lumbering corporate behemoth that probably could've gone under years ago were it not for the ability to hide its weaknesses behind its sheer size. Controlling a plethora of aging brands that complimented each other very little, and pairing this with a bloated sales network, the firm already made a loss of $30bn last year before the problems really got started, and sorely lacked the fleet of foot that has been demonstrated by its Asian competitors since the early 1990s. President Obama therefore stressed the desperate need to streamline the company's operations, and watching the news footage last night, Detroit certainly looks like the one of the birthplaces of modern industry, but not the forefront.

Meanwhile yesterday it seems the markets took a pause yesterday on the GBP/USD rally, reaching and sustaining a peak of around the $1.64 mark. With Sterling having recovered a substantial chunk of its decline against the Dollar from the 2.10 highs of late 2007 the the 1.35 lows of January this year, it seems likely to stay around these levels for the near future, though the long term trend is undoubtedly up. US treasury secretary Timothy Geithner is in Beijing this week, his aim to allay the fears of the Chinese regarding their colossal USD reserves that (based on the dollar index against other currencies) have seen their largest monthly decline in quarter of a century. His assertion to a student audience that 'Chinese financial assets are very safe' drew laughter, and his aim now is to convince the Chinese of the US governments own commitment to a strong Dollar. With equity markets continuing to rise, it seems likely that investors will continue to unwind the haven positions they have built up in USD securies.

On closer shores, Sterling made further gains against the Euro yesterday, touching 1.16 before falling today to around 1.1560. The biggest driver of GBP/EUR this week will be the ECB rate decision on thursday. Although it seems certain to hold at 1%, any further indication of quantitative easing methods being introduced will damage the Euro and see these gains continue. Positive Construction PMI and Mortgage Approval data for the UK has already been released this morning.

Jonathan Smith | Asst Manager, Treasury Solutions UK | Wholesale Banking | NAB Ltd

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