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Yesterday most of the good sentiment was fed into the markets on open following the announcement of a $3 billion plan to recapitalize CIT. Sterling initially rallied against the US dollar and Japanese Yen but early gains consolidated in later trading. Although the feel good factor is still in place the market is a little cautious and awaiting Fed chairman Ben Bernanke’s semi-annual review on the economy later today and also further US corporate earnings this week. GBP/USD retreated from a high of 1.6548 to settle in the mid 1.64 area, GBP/JPY topped out at 156.4 and now sits at 154.70, GBP/EUR remains in sideways trading at 1.1570.

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Really positive start to the morning and to the week as news filtered through in Asian trading that CIT received a $3 billion rescue package from a group of bond holders to stave off bankruptcy. CIT has a sizeable number of clients among fashion labels and retailers and the perception of bankruptcy was leading to negativity in the equity markets. On the back of this news we have seen a big shift in Yen crosses and a sell off in the USD…GBP/JPY has moved up from 153.80 to 156, USD/JPY from 93.20 to 94.60. The pound has pushed up to 1.65 on the USD from 1.6350 and the euro has pushed to 1.42 against the USD. Ultimately we are seeing a shift back into risk appetite this morning with USD and YEN weakness, strength in the commodity currencies such as the AUD, ZAR and CAD and also a boost for the pound and the euro.

Other news out this morning which was sterling supportive came from UK Rightmove house price data which rose 0.6% for July. This data supports the sentiment that the rate of the fall in house prices is markedly slowing and a bottom may now be in place. It will be interesting to see if the equity markets continue to rally on this morning’s positive kick start- the FTSE 100 has started positively. Sterling will look to sustain a move to 1.66 against the dollar; against the euro we are still a little flat at 1.16 and a move towards 1.17 could be on the cards if the good sentiment continues. A portion of news that could be potentially euro negative was reported by the Telegraph- the German property giant Hypo Real Estate may require at least 10 billion euros in fresh capital to stay afloat. The euro has not suffered on this news in the markets as yet as it has been largely buoyed by a weaker USD.

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A cagey day in the markets yesterday as mixed data prevented any dominent trend in the currencies. Sterling struggled to make a push for 1.65 against the dollar as news that CIT would likely head to bankruptcy maintained a cap on the bulls. In the US we saw data from Initial jobless claims and continuing claims which both came in better than anticipated- however the fall in initial jobless claims was attributed to seasonal factors and therefore not taken as a bullish number in the markets.

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Yesterday, the Federal Reserve released the minutes from their June meeting and the market was a tad surprised that the changes relative to April’s forecasts were mostly positive. Fed commentary in recent weeks has been mostly gloomy but the revisions to the central tendencies for official projections were all upward, for both growth and core inflation. The information on the asset purchases programs and balance sheet was really interesting (and we should learn more next week from Bernanke). The intimation is however, that the Federal Reserve Board staff expects the Central Bank’s balance sheet to peak later this year and decline gradually from then on. Given that we are currently down by about $300 billion from the peak last December, this implies that we are due a degree of expansion over the next 3-6 months via an increase in the asset buying programme. The feel-better-factor appears directly related to the upturn in US earnings figures that are coming through. Of 42 2nd Quarter Results reports so far, 28 (66.7%) have had positive surprises, and 10 (23.8%) have had negative surprises. On the calendar scheduled for release today are JPMorgan and IBM. The market will be looking for their results to emulate good reports from Goldman Sachs and Intel this week.

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In the current climate sentiment is changing like the drop of a hat; the swings from risk on to risk off in sentiment are directly affecting the currency markets. Yesterday for the most part we saw little volatility in the FX rates, due to the previous days risk appetite sterling was trading higher and the Yen and the USD came under pressure. Yesterdays earnings results from Goldman Sachs were strong as anticipated but the price had already been factored in on the previous day…this led to a muted reaction on the results with shares only rising 0.2% on the news. On the currencies GBP/USD remained stalled at 1.63 and EUR/USD a shade under 1.40; later in the session Intel gave forecasts for the current quarter revenue which beat expectations and led to a burst of risk appetite and GBP/USD headed to 1.64 and EUR/USD to 1.4070.
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Of late we have become accustomed to sudden changes in global economic sentiment as the uncertain markets digest every sound bite of economic feedback. This pattern repeated itself yesterday as the risk averse cloud was lifted by bullish comments from analyst Meredith Whitney that banks’ quarterly results may be stronger than expected. This was unusual as this particular analyst is a well known bear and optimism from a bear is more welcomed by investors than optimism from a bull. The impact in the FX markets was directly apparent as the Yen shed its recent gains along with the USD. Looking at the Yen crosses it has weakened from 91.80 to 93 against the USD & to 152 against the pound. The pound and the euro are also advancing against the USD, the former gaining from 1.6050 to 1.63 and the latter testing 1.40 again.
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