It now looks like the strong gains that Sterling experienced after the US QE measures have started to abatem, as traders take some profit out of the large moves, bringing Sterling back down to below 1.42 against the USD, it ended last week up near 1.45. The Dollar seems to have shaken off any weakness from Geithner's comments over the prospect of governments using the IMF's reserve currency, which is made up of a smaller proportion of Dollars than most nation's current currency reserves; comments from other representatives of the G20 nations seem to have confirmed the Dollar's status as the premier reserve currency, and even if the Chinese do raise it at this weekend's G20 meeting it is unlikely to make any headway.
Sterling has stayed weak against the Euro, hovering between a range of 1.07 and 1.08, not helped by further news of weakness from the banking sector. This time it is on a relatively small scale with the Dunfermline Building Society stumbling, and needing some government guarantees to help it through to a quick takeover. Banking weakness always seem to happen at weekends, and it wasn't just the UK officials working through a sunny Sunday, as Spain had it's first bank needing government guarantees to continue trading, as the savings bank Caja Castilla La Mancha had been tilting at windmills by chasing returns that didn't exist outside of it's normal trading market.
The Dollar's rise over the weekend has also forced the AUD lower, however with most of the news out last week supportive of the Australian Dollar, reports suggesting that the banking and the housing sector are in relatively rude health, the AUD has still kept some of it's gains keeping near 0.67 against the USD, while Sterling is still below 2.09 against the Aussie Dollar. Although the markets seems to have downgraded the prospect of further drastic rate cuts in Australia, this week's economic reports on credit and retail sales are likely to further the chances of at least another 25bp cut, which could check the AUD's rise, at least until supported by further stock market moves.
The week ahead is busy and contains numerous data releases, but is likely to be dominated by the ECB rate decision on Thursday, and the build up to the G20 meeting at the weekend, which may even overshadow Friday's non-farm payrolls report. In the light of the barrage of weak Eurozone data the ECB meeting is almost certain to deliver a 50bp cut, the Euro could see a big drop if QE measures are announced, which is unlikely, however there have been a few noises from ECB members, and if they make these noises during the meeting, or more importantly in the press conference afterwards, then the Euro could take a dive. Gordon's plan to get everyone to agree to a $2trillion fiscal plan at this weekend G20 meeting has been leaked and seems to have been scuppered, I assume that was $2trillion of other peoples money, as according to Mervyn the UK has none left; China's plan of promoting the alternative reserve currency also seems to have hit a brick wall, but traders will still be nervous as the first G20 meeting with the new US administration could have an effect on the markets.
Michael Corcoran - Treasury Partner | Treasury Solutions | nabCapital