The currency blog

After several weeks on the sidelines, Sterling should be back on the mind of the market with two important announcements over the coming days. The first is UK GDP which is expected to show the return of negative growth, with the consensus estimate of 0.1%. The second, which will be directly influenced by the first, is the most recent MPC minutes. The market will be looking for any hint of further monetary easing over the next few months, the probability of which rises for every percentage point decline in the growth rate. It is looking likely that the UK will re-enter or may already be in a technical recession so further QE, which is Sterling negative, is highly likely at some point this year. In early trading this morning we are relatively unchanged.

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Against all the odds the single European currency has been resilient this week moving up towards the year to date highs of 1.3068, clawing back its losses and more.

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The recent rally in the Euro is very surprising given the lack of any positive or even specific Euro related news over the past couple of days. Market sentiment about the single currency remains low (after a temporary blip last week) because a Greek default is looming ever larger and European policy makers are still arguing over the rules that they hope will make the Euro-zone stronger moving forward. In fact short positions (betting that the Euro will fall in value) hit record highs over the past couple of weeks, which suggests there recent rally is more about shorts covering their positions, leading to the price of the Euro rising forcing other shorts to cover, commonly known as a short squeeze. If, as is likely, this explains the recent uptick in the Euro we can expect Euro selling to resume once the squeeze runs out of steam. Data for the Euro-zone for the rest of the week is extremely light, with the ECB monthly report showing how much the ECB is lending to stricken banks is due Thursday along with French and Spanish bond auctions. Both auctions will be closely watched in light of the S&P downgrades on Friday.

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After markets closed last night, Standard and Poor’s the rating agency dealt a severe blow to the European bailout fund by downgrading its AAA status to AA+. The agency blamed the large number of guarantors that had lost their triple A crown and therefore the funds itself could not maintain the gold standard rating. Following the announcement, EU officials attempted to reassure markets that the funds will not change is ambitions to lend billions of Euros to struggling Eurozone states.

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A new shockwave filtered through the markets on Friday as the credit agency, Standard & Poor’s, downgraded France, stripping the European powerhouse of its prized AAA rating. The decision to remove this vital asset in keeping borrowing costs to a minimum left France with a AA+ rating, a judgment that will likely cost billions in higher repayment costs. S&P said “Europe’s austerity and budget discipline alone were not sufficient to fight the debt crisis and may become self-defeating”. Alongside France, S&P cut the rating of Italy, Spain, Cyprus, Portugal, Austria, Slovakia, Slovenia and Malta though it was expected that these countries would have their ratings lowered. Overall, the picture isn’t looking good for Europe and with further downgrades likely over the next few months, it will be important to see how the ECB reacts in keeping this ongoing debt crisis under control. Read the rest of this entry »

Mr Market continues to be driven almost exclusively by extreme changes in sentiment on a day to day basis. The recent Euro rally stems from the positive outcome of Spanish and Italian bond auctions yesterday. Both countries we able to place the bonds at considerably lower rates than in recent auctions lifting sentiment and the Euro throughout yesterday and into this mornings trading. Worryingly data just out showed Spanish Banks borrowing almost €140bn from the ECB in December, almost the record high set back in July 2011 and this tugged sentiment back in the negative direction. Read the rest of this entry »