YB FX Daily Report – 9th July 2009

YB FX Daily Report – 9th July 2009

Against a backdrop of issues such as the G8 summit, impending BoE rate decision and a general reassessment of global short-term growth prospects, currency markets had much to ponder yesterday with trading in most major currency pairs fairly static, bar some large (risk-aversion fuelled) downward moves in GBP/USD and GBP/JPY later on as stock markets globally had a poor day. Weaker outlooks were generally the driving force of the day, and as commodities were hit by revised demand expectations, this fed into currencies of the commodity-centric economies such as Australia, where GBP/AUD jumped over 2 cents late afternoon. Indeed, the Yen soared to a five-month high against the Dollar, and government bonds gained ground as escalating risk aversion drove nervous investors away from commodities & equities. Last week's poor US non-farm payrolls data seems to have triggered a fresh bout of realism regarding global growth, and cautious comments so far from the IMF and G8 leaders have done little to persuade equity investors to hold on as we enter second-quarter corporate earnings season.

Today the biggest event for the FX markets, aside from any updates from the G8, will be the Bank of England Base Rate decision, though this is a misnomer as the real decision is not with Base Rate but any further update regarding the Bank's Quantitative Easing programme. With the BoE authorised by the Treasury to purchase up to £150bn of Gilts throughout the process, the major question is whether they will extend the purchasing programme past their initiail self-imposed total of £125bn. Currently £110bn has been taken up, with the current phase designed to have been completed by next month, when decisions will be made about its longer-term application. The BoE's two big announcements on QE since early March have both resulted in GBP moving lower over the following days, with the market taking the view that the higher the QE spend on government debt buying, the higher the inflation/currency debasement. This negative reaction has also been relatively short-lived and may prove the case after today, though GBP may have a lively day post 12PM.

The G8 meeting has produced nothing of substance so far , and whilst FX markets have been fixated on the issue of the USD's status as global reserve currency over the last few weeks, this will have little place on the agenda at this weeks meetings. In any case, even the BRIC countries that have been flying (or lowering) the flag for a reduced reserve status accept that this is an ultra-long term initiative, and that the current status quo will remain for many years to come

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