The currency blog

On the day that Anglo Irish chalked up the biggest corporate loss in Irish history, we also get to see the results of forensic stress tests on the sickest banking system in the Euro-zone. The tests are expected show that Anglo, Bank of Ireland and Allied Irish along with several others are in need of further capital injections to the tune of €30 billion to stay in business. What the stress tests are also expected to reveal are the size and scope of current mortgage arrears, that is, how many and how far behind are a sizable portion of Irish households with their mortgage payments. In terms of the Euro, the expectations is that recapitalisation number will be large has had little impact in the market as yet. More focus has been paid to recent reports that the Portuguese do not have enough cash to meet their debt obligations and a bail-out is almost assured. Again the news flow is very Euro negative, but the single currency seems to be able to brush off everything thrown at it. Earlier in the day German unemployment figures continued to impress, a ray of light in a potentially dark day.
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Household’s disposable income is officially on the slide according to figures from the Office for National Statistics yesterday. Real income dropped by 0.8% over last year with a 0.5% in the final quarter which suggests the living standards in the UK are on the slide. There was a slight reprieve on the GDP front as the dire 2010 last quarter results were revised up to half a percent contraction from the original 0.6% estimate. Despite the effects of the bad weather in December the economy stood still in the last quarter of 2010 it said, a slight improvement on the previous calculation.
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Sterling remains under pressure this morning as we await a large UK data release including 4Q GDP (final revision), current account and mortgage approval figures. It is difficult to tell whether it was anticipation of these figures or Hawkish comments from various Federal Reserve governors at the end of last week that pushed Cable down from 12 month highs post budget, but the outlook for the UK economy has been significantly reassessed by the market and we may see the Pound test the key level of 1.5980, which has held in the pairs range trading over last few weeks, if today’s data disappoints. Adding to the negative sentiment, business confidence fell to the lowest level in two years according to figures released yesterday and we also had comments from the Bank of England’s resident dove, Adam Posen, reiterating that he feels inflation will fall back below the 2% target as the government austerity measures and weak economy rein in what he sees as temporary inflationary pressures. With several other members of the MPC due to speak this week and Andrew Sentance again calling for higher interest rates in an interview, the divergent views of the MPC are becoming more pronounced and a split MPC is most definitely Sterling negative.
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Today starts another action-packed week for the markets with big figures due out from all around the World. Last week was eventful with huge moves surrounding the Euro, US Dollar and Sterling and that is likely to continue. US GDP for the last quarter was released on Friday afternoon and came in better than expected at 3.1%. This led to a strong finish from the Greenback that has persisted this morning with Eurodollar dropping towards the 1.40 level.
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The Euros resistance to bad news has been remarkable. Recent blows include the rejection of the Portuguese government’s austerity plan, a likely hold-up in the attempt to  increase the size and scope of the EFSF EU bailout fund, a fall in Eurozone PMI this month and finally a decision last night to downgrade Portugal’ sovereign credit rating by Fitch and S&P. In spite of all of this, and following touching a low of around EUR/USD 1.4054, EUR has bounced back close to the 1.4200 level.
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We mentioned on Monday that this week would be very interesting for Sterling and so it has proved. Inflation figures on Tuesday sent the Pound towards a twelve month high against the Dollar, but the publication of the Bank of England minutes, released yesterday, immediately reversed the gains of the previous day. Again the MPC were split 6-3 in favour of keeping rates on hold. There were further signs that more MPC members are gradually coming round to the idea that rates should rise, but the probability of an imminent increase in the banks base rate has all but diminished and the 4th quarter now looks like the earliest time the bank would act. The highlight of budget yesterday was Justice Secretary Ken Clarke falling asleep during the hour-long speech by Chancellor George Osborne, which says it all about one of the most widely leaked documents in recent years. The market already knew what was coming and understood Mr Osborne’s hands were tied. The general consensus is that he played his hand as well as can be expected, but the worry continues to be the downgrading of UK growth – we need GDP growth to service our debt load – and given the scale of the cuts which are about to take place the Chancellors confidence in his policy may begin to wane.
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