YB FX Daily Report – 7th May 2009

Sterling had another good day yesterday as risk-aversion eased allowing gains above 1.14 against the Euro and 1.5150 against the US Dollar overnight. US banking stocks climbed yesterday on a report suggesting that less of the 19 banks given the government stress test will be needing extra capital than expected. Although the official information is not out until tonight, Bank of America are expected to need an extra $34bn of new capital and Citigroup an extra $5bn but some of the others including Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of New York Mellon & American Express not needing to raise extra funds. US ADP employment change also came in better than expected increasing the optimism in other markets with the FTSE ending up 1.37% led by the banking stocks. UK service sector PMI rose to 48.7 in April from 45.5, better than the expected 46.3 but a score below 50 still signals a contraction in the sector. US ADP employment change came in better than expected as well which seems to indicate the worst may be behind us.

Investor confidence has also helped the Aussie dollar with AUD dipping below 2.00 against the pound, a level not seen since the mid 90’s. AUD has been helped by positive results recently, the unemployment rate came in better than expected at 5.4% and consumer spending rising 2.2%, aided by the government stimulus package, far exceeding the 0.5% increase expected showing that Australia is weathering the recession far better than some others, for now at least.

All eyes will be on the central banks today with the Bank of England and European Central Bank announcing interest rates. The BoE are expected to leave rates at the current 0.5% any the ECB are expected to cut rates to 1% from 1.25% but there will be more interest in whether they give indications of future quantitative easing measures which could have severe implications for the Euro although an extension of the ECB loans to banks being a weaker option they may take. How much QE would harm the single currency is still quite hard to predict especially with the recent information pointing to a slowdown in the recession. We also have the German factory orders announced later this morning with an expected year on year drop of 35.8% which could also harm the Euro should this be any worse than expected.

Jonathan Greensit | Asst. Manager, Treasury Solutions | National Australia Bank Ltd