The currency blog

Yesterday the Bank Of England held the official interest rate as expected at 0.5% but surprised the markets by increasing the size of their asset purchasing programme by £50 billion- phase 2 of QE. This now brings the total facility to £125 billion as the treasury pushes forward in its desire to ease credit conditions- the scope of the asset purchase programme will remain under review and there is potential to increase the facility further. The question remains- will this further injection help? Economically conditions remain tight with Q1 GDP contracting by 4.1% and unemployment still rising…UK govt bond yields are actually higher than pre QE…it seems the supply of money is getting clogged in the financial system for now so time will tell if it will eventually prove effective. An obvious danger is that it is overcooked and we could then be looking at sharp inflationary pressure and interest rates shooting higher.

Over to the ECB and as expected the official rate was cut by 0.25% to 1% a new record low. In addition Trichet announced plans to buy €60 bn of bonds in eurozone companies and lend banks unlimited funds for up to 12 months. On the back of the announcement the euro initially weekend and then surged against the dollar and the pound hitting 1.34 against the dollar and retracing from 1.14 to 1.12 in afternoon trading. It seems that initially the markets are embracing the fact that the ECB are now showing more proactivity to stimulate the economy- a strange reaction as the market anticipated more volumes than announced and you feel uncertainty and indecision still reigns within the ECB committee.
Also of note was last nights release of the stress testing on US banks. The fed projects that the 19 banks could suffer losses up to $599 billion if the economy continues to slump and ordered 10 of the 19 banks to raise $74 billion in capital to cushion themselves in a worst case scenario in the economy. Surprisingly the markets were little moved on the news and the dollar remained fairly static. Today we have the release of US non-farm payrolls which is a big number for the markets- the report presents the number of people on the payrolls of all non-agricultural businesses- a better than expected number could further boost the equity markets and selling of the USD as pro-risk trades take hold…we will also see unemployment data from the US later.

Discuss on this on the Currency Exchange Forum