FX Market Overview

Sterling had a slightly more stable day yesterday after Monday’s heavy falls. Traders were taking profits on the Monday moves and selling Sterling each time it attempted to increase in value. Consequently, whilst the Pound didn’t carry on slumping (that sounds like a 70’s movie title if ever I heard one), neither couldn’t muster any strength. Nervousness remains over the prospects for a hung parliament and the Greece issue continues to keep investors away from the larger European area. Further warning were issued by Fitch, a credit ratings agency that the government’s plans to cut Britain’s deficit from 112 percent of GDP to 6 percent by 2014 were not stringent enough and that this plan would threaten Britain’s coveted triple A credit rating; yet another reason to be wary of the Pound. Sterling sits in an uneasy equilibrium this morning but we have to wonder whether that is a status quo which can last.
The US Dollar had a similarly sideways day but did drop a little value overnight. Nervousness over the ending of the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF) is keeping traders anxious; recent US data has been positive but not extraordinarily good and analysts are concerned that the TALF package may come to an end prematurely.
Today is a big day for the Euro; EU Finance Ministers are demanding a fresh austerity plan from Greece before deciding whether to take direct action to 1) distance themselves from Greece’s financial problems and 2) stop Greece going bankrupt for fear that that loss of credibility will trash the Eurozone’s claim to being a stabilising influence. Greek Prime Minister, George Papandreou is clearly playing a game of brinksmanship with the other EU leaders; let’s just hope he has a good poker face and that he comes through with the mooted package of €4.8 billion of spending cuts to ensure a deal can be reached in the end. The alternative would be a dive in the value of the Euro and sadly, a similar slump in the value of Sterling due to the UK’s immense government debt and parallels drawn with Greece’s situation.
We will get a chance to see if there is any reaction to this situation from both the European Central Bank and the Bank of England tomorrow when each central bank announces its interest rate decision. No change is forecast from either bank but we may get some insight in the ECB’s press conference. Sadly the BoE doesn’t usually hold a press conference unless a change is made to their policy so we will have to wait a fortnight until the minutes to this meeting are published to assess their mood. There is an outside chance we will get a change in the level of quantitative easing but that is strictly an outside bet. Such is the interest in the Greek matter that today’s release of Eurozone purchasing managers indices and retail sales data is likely to be muted at best.
In other news, Oil stabilised below $80 per barrel, helping to slow the advance of the Canadian Dollar but the CAD still made some headway against the Pound. This follows on from the Bank of Canada choosing to retain a 0.25 percent base rate after it meeting yesterday. That was widely expected and we are unlikely to see any upward moves in the BoC’s base rate until a similar change happens with their neighbour and best customer, America. However, the Canadian economy grew at 5.0% in the last three months of 2009 and domestic demand is growing so the BOC is perhaps under more pressure than other central banks to normalise their interest rate regime sooner rather than later.
Overnight confirmation that the Australian economy grew at a very healthy 2.7 percent in 2009 was greeted with a bit of a yawn because it was precisely in line with the market consensus forecast. However, 0.9% growth in Q4 was the fastest pace in 2 years and puts the Reserve Bank of Australia in a similar position to the Bank of Canada in that they are having to think about tempering inflation with interest rate hikes. The difference is that the RBA is already well advanced in its interest rate hiking policy and pushed their base rate up by another 0.25 percent only yesterday. The Aussie Dollar didn’t strengthen on this news but that is what happens when people have already bought the rumour.
Today is light on the hard data but the Greek thing is still keeping the tongues wagging and tomorrow’s central bank action will continue that pressure.
In the meantime, I am not sure whether to be happy or sad that the televised election debates between the party leaders are going ahead. They have agreed 76 clauses including stopping the audience from clapping or cheering because it may influence voting decisions. I am not sure what the other clauses are but I wouldn’t put it past any of them to have banned any question which involves the words expenses, Iraq, deficit or truth.