The currency blog

…. between the Yen and Sterling. Both currencies are being seriously undermined by both political and economic concerns and are running neck and neck towards the edge of the precipice. On the political front, the replacement of Fujii by Kan as Finance Minister was not greeted enthusiastically and as mentioned yesterday the Yen took a little dip in value. The major concern, was that the Japanese bond market might take flight and the ability of the Ministry of Finance to satisfy the country’s massive debt mountain could become compromised. Added to this, the first official comments from Kan were distinctly Yen negative with him saying he wants the Yen to weaken further (fell immediately from 91.10 to 91.75) and then adding that many Japanese firms favour the $/Yen rate at 95.00 and that he must work with the Bank of Japan to bring the Yen to appropriate levels. Beat that lot, sterling …. Well it did its best.

On the political front, the call from the 2 cabinet members for a secret ballot of Labour MPs to establish Gordon Brown’s position as leader of the party was viewed very negatively by the market on the assumption that a leadership battle this close to the election would be the final nail in the coffin for the Labour party but also, might be enough distraction for them to take their eye off the economy. Following on from this, there is a report in the white Times this morning headed up, “Cash-strapped Treasury contemplates shining up gilts” which ponders the possibility that the Government might be forced to offer higher returns on its gilts in an attempt to maintain their investment appeal. This will obviously have the effect of further increasing the cost of servicing the country’s borrowings from the current forecast of £60 billion per year - and that is just the interest component.

The Chancellor is seeking to sell a record £225 billion tranche of debt this year at the same time as the Bank of England look to offload the bonds that it acquired via the Asset Purchase Scheme as part of the QE process and against the back-drop of investor concern over the UK’s status as a AAA rated sovereign. The MPC meeting today is unlikely to produce any change in rates or Asset Purchase size and as such might be viewed as Sterling negative.

The minutes from the Fed meeting were largely as expected although concern was raised by some over the inflationary impact of the declining Dollar’s value. This view was countered to a degree by James Bullard of the St Louis Fed who said that inflationary risks for the US won’t occur this year and that it will probably be 2 or even 3 years down the line before signs of an upturn in inflation appear. Euro/Dollar remained largely unperturbed overnight and through the Far East market this morning.

Discuss on this on the Currency Exchange Forum