The currency blog

Angela Merkel’s announcement of a ban on short selling any sovereign bonds, credit default swaps and shares in Germany’s top ten financial institution was supposed to bring calm to the markets – instead it had the opposite effect. Euro-Dollar hit a fresh low, sliding to 1.2140 before recovering significantly after rumours of the Fed and ECB checking prices at major banks (which is tantamount to direct involvement) and stock markets around the world suffered further falls. There was widespread condemnation of the move, the main fear being that the regulations would scare investors away from the Eurozone just at the point when it needs them the most (BNP Paribas reported major capital flight to Switzerland yesterday). It is also a blatantly political move masked in economics, designed to garner support from the left and shore up Merkel’s government. The effectiveness of a one country ban on short selling can be summed up with the example of Deutsche Bank, Germany’s largest financial institution, who after the ban was introduced ceased trading in CDS’s between 7am and 9am until they realised the ban only applied in Germany and promptly resumed normal business through their London office.
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Euro-Dollar came under pressure last night after Germany announced a ban on naked short selling on some securities effective immediately. Included in this bracket are the Eurozone Sovereign bonds as well as 10 of the biggest financial institutions. The proposal was meant to calm the markets, but the Euro plummeted below 1.22 against the greenback. Naked short selling is when a trader sells a financial instrument, such as shares or bonds that they have not yet borrowed. The Dow collapsed 114 points on the news as fears of a drop in funds for banks which could result in a scramble for cash as seen in the depths of the credit crunch 2 years ago.
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George Osborne the new Chancellor of the Exchequer announced yesterday that he was “changing the way Budgets are made forever”.  He claims that unlike his predecessors he will “fix the budget to fit the figures” and provide tax payers with a greater clarity over the UK finances. This is ahead of his emergency budget next month, he plans to outline 6 billion pounds in spending cuts this year ahead of an emergency budget on June 22.
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The Euro has continued sliding against the Dollar, reaching the lowest level in four years. Concerns remain about the massive bailout package announced by the EU and IMF last week and how effective (or not) it might be addressing the core issue affecting troubled EU member states, namely huge fiscal deficits. The ECB have been intervening directly in secondary bond markets, bringing some well needed stability and halting the huge volatility in yields over past couple of months. The side effect of the ECBs intervention has been to move all traders with negative view of the Eurozone from the bond market to currencies, and with EU officials publicly announcing the need for a weaker currency, it looks like a one way bet at the moment. Most of the financial press over the weekend were calling for parity in EuroDollar, but if the market is over sold we may see a short squeeze over the next few days before the Euro moves lower again. Read the rest of this entry »

The Eurozone took yet another pounding yesterday as rigorous fiscal tightening threatens to dampen an already weak recovery. EUR/USD has crashed to 14 month lows of $1.25 after boosting to nearly $1.31 on Monday after the $1 trillion emergency rescue package was announced. News that one of the “PIGS”, Portugal is attempting to cut €2 bn from its budget gap has done little to reduce the weakness in the Euro and with more tax hikes and salary cuts due, we could see ugly scenes like those witnessed from Greece. ECB President Jean-Claude Trichet has stated the ECB is not “embarking on quantitative easing” and he reiterated that “the Governing Council will not tolerate inflation” leading to speculation a rise in interest rates could be on the horizon.
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There will be a “historic and seismic shift in politics” according to the new PM David Cameron yesterday as he formally announced Britain’s first coalition Government since World War II. Commentators are sceptical about the new relationship of once fierce rivals and Clegg himself conceded that there may be “bumps and scrapes” during their time in office.

The new PM’s main priority is to reduce the size of the £163billion budget deficit, starting with £6 billion of cuts this year. This plan was publicly endorsed by Bank of England Governor Mervyn King yesterday, who spent the morning discussing the plan with the Chancellor of Exchequer, George Osbrone. An unusual move by King to make political alliances with a party but indicates the Governor’s concerns over the economy as opposed to politics.

King’s Quarterly Inflation Report projected that inflation will remain above target for the rest of the year, March figures we upwardly revised to 3.4%. Also in the UK unemployment for the three months ending in March stood at 8.00%, the highest level since 1994. Unemployment increased by 53,000 to 2.51 million according to the office for National Statistics.
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