Positive signs came through for the global economy today as world stocks hit a new 12-month high, driven by positive earnings from US tech giant Intel and surprisingly strong trade figures from China. The euro has hit it’s highest since August 2008 at USD 1.49 on EBS trading systems whilst the pound rallied to make a recovery from falls earlier this week. The Swiss franc also rose to its strongest since July 2008.

UK Market – Pound Sterling News

A break above today’s top and current resistance at 1.599 could lead to further strengthening of the British currency.

The pound has rallied at a good pace over the last 24 hours to reach a 1.59 Asian session high against the US dollar. Having softened somewhat on early European session, sterling bounced up immediately after the release of better than expected employment figures, and has returned to levels just below 1.60.

European Market – EURO News

The euro is trading at a 14-month high, reaching levels below 1.49 on broad-based dollar weakness.

Some analysts are speculating that yesterday’s close above 1.48 suggests the euro might be ahead of a firm rally, which would be confirmed by a weekly close above that level. The euro zone released its industrial production for August at 0.9% higher than the revised prior reading of 0.2%, whilst on the year it improved to -15.4% from -15.9%

US Market – US Dollar News

Currency investors continue to speculate about when the US central bank will tighten its monetary policy. This speculation comes ahead of US corporate earnings figures and speeches from Federal Reserve officials later in the day, thus putting more pressure on the US currency.

The US dollar stumbled to a 14-month low against the euro on Wednesday, sending gold prices to record all-time highs and pushing up oil for a fifth day to a 2009 high. These commodities and the US currency are often inversely correlated, with gold and oil seen as alternative currencies and hard assets themselves.

World Currencies – News Highlights

Buoyant commodity prices and confidence in the technology sector propelled Asian stocks traded outside Japan to their highest levels since early August.

Improvements in Chinese export and import data for September as well as an unexpected rise in its copper imports also showed promise for the rest of the year, offering new evidence that its economy is improving and that the global economy is on the road to recovery.

The dollar versus the yen continues to trade within a minor bearish channel nearing its main support at 87.80. The Swiss franc is the strongest since late July 2008 at 1.017 against US currency whilst the Australian dollar continued appreciating at a good pace. After bouncing on Tuesday at a 0.90 low against the US dollar, the Aussie has broken to reach another 14-month high at 0.915

UK Market – Pound Sterling News

The Pound has made strong gains on the Euro overnight although this has started to tail off this morning. The new Office for Budget Responsibility’s first data set released yesterday has set a bleak picture for the upcoming emergency budget on the 22nd June. Growth forecasts made by the last Government have been slashed by nearly half a point from 3.25 percent to 2.6 percent meaning that the new Chancellor has an £12 billion gap to fill from spending cuts and tax rises, with an extra £2.4 billion to raise next year.

Borrowing however came in at £23 billion less than feared but a tough budget is still expected to tackle the growth reduction and the amount of structural debt.

There are further data releases due today in the UK covering the consumer prices, house prices and retails prices.

European Market – EURO News

Moody’s Investors have cut Greece ‘s credit rating down to Ba1 which is a non-investment grade due to their perception of ‘substantial’ risks to the nation’s economic growth. A German report is also due today which is expected to reveal that investor confidence in the German economy has declined to the lowest in a year highlighting the problems for all single-currency nations.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have made plans to call upon the G20 to introduce a global bank levy and financial transaction tax.

US Market – US Dollar News

The Dollar lost against the Pound overnight but is beginning to gain ground this morning. The Dollar is continuing to make gains on the Euro since last night after the credit downgrade in Greece has caused money to flow away from the single currency. US Data to be released today which may cause market movements includes the API Crude Oil Index which indicates oil demand and price volatility as well as TIC flows by the US Department for treasury showing flows of financial resources therefore painting a picture of the state of the deficit.

World Currencies – News Highlights

The drop in the Euro to some of the lowest levels in the last four years has caused investors to diversify and seek alternative currencies not as directly affected by the collapse in the Euro region. Canadian Dollars and Swiss Francs made up record shares of global bond sales yesterday. Currencies other than US Dollars and Euros accounted for 29 percent of the total.

The Australian Dollar has fallen after the nation’s central bank suggested that the situation in Europe will affect the global growth outlook.

The Pound gained on both the Euro and the Dollar overnight although each has just started to claw back some ground this morning.

UK data that has been released this morning covers money supply, mortgage approval and public sector borrowing data. The UK has approved 51,000 mortgages in May up from 49, 900 the previous month adding to the wealth of recent data suggesting the UK housing market is beginning to recover.

Santander , the Spanish bank who already owns Abbey National, Alliance and Leicester and Bradford and Bingley has submitted an offer to buy RBS’ Williams and Glyn’s subsidiary. RBS’ sale of this unit along with 318 branches was a condition of its bailout by the Government.

Thoughts in the UK markets are turning to the fast approaching emergency budget on Tuesday next week. Although investors currently respond well to nations making decisive moves to rein in deficits, a budget historically shakes the Pound so there may be some volatility – speak to a Currency Solutions broker for advice.

European Market – EURO News

The Euro has gained against thirteen of its sixteen most traded counterparts.

In particular, the Euro made its near largest weekly gain on the Dollar since May 2009 aided by the Spanish bond sale yesterday which has clearly helped investor confidence that Eurozone nations can raise funds to tackle the crisis. Spain yesterday sold 3.5 billion Euros worth of 10-year debt.

US Market – US Dollar News

The Dollar has lost out to many major counterparts overnight including the Pound and the Euro although it has started to rise against the Euro again so far this morning.

The Philadelphia Federal Manufacturing Index figures released yesterday were disappointing and are being attributed to bringing some weakness to the US Dollar. This was further reinforced by the rise in initial jobless claims. Jobless claims rose to 472,000 for the previous week rather than meeting an expected drop to 454,000.

World Currencies – News Highlights

The Yen has gained for the fifth day in a row against the Dollar as the new Prime Minister made public pledges to work to cut the Japanese public debt which is the largest in the world. He suggested he may do this by possibly by raising consumption tax. Other Asian currencies also strengthened as demand for higher yielding assets continued.

Is he being too pessimistic? Perhaps, although he did concede that “our economy… is slowly healing.” The governor also mentioned that “the squeeze on real take-home pay is coming to an end” and producer price index figures released on Friday told a similar story about business margins. Input prices – manufacturers’ costs – fell by -2.4% in the year to July while output – factory gate – prices were up by 1.7%.

The news had little impact on sterling but later in the day the pound did bounce from Wednesday’s low against the US dollar. There were no data or news to provoke the one-cent rally, which looked very much like the result of investors covering short sterling and euro positions ahead of the weekend. Sterling starts this morning half a US cent above Friday’s opening level while euro/dollar is a dozen ticks lower. As a result, the pound has added half a cent against the euro and is a touch higher against the yen.

With Germany’s wholesale price index already out of the way (up by 0.3% in July and by 2.0% on the year) almost nothing remains on today’s ecostat agenda.  Euroland’s current account deficit for June is due as London opens and Greece may or may not publish the litany of woe that is second quarter economic shrinkage. And that’s it until tonight, when New Zealand reports on retail sales, Australia releases the latest business confidence figures and the RICS reveals how quickly UK house prices are falling.

There is not much there to help or hinder sterling. But consider something else the governor said in his article; “the problems of the euro area continue with no obvious end in sight”.

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Investors’ earlier aversion to the euro had been driven by a sense that EU national leaders and the European Central Bank had no collective plan to deal with Spain’s financial difficulties. Even the bailout for Spanish banks, agreed in outline a month earlier, had yet to be finalised. Another problem for Spain is its regional governments, some of which are thought to be in need of financial support from Madrid. Taking those factors together with high unemployment and negative growth, investors shunned Spanish debt, forcing the government to pay steadily more for its borrowings.

Then, towards the end of July, the game changed. Mario Draghi, the ECB president, gave a speech to a global investment conference in London. In it, he said he would do “whatever it takes to preserve the euro.” It was fighting talk and it sent the euro higher. The assumption was that whatever it took to preserve the euro would amount to more than words. Expectations were high for the ECB council meeting on 2 August.

For some, those expectations were met when Mario Draghi set out a comprehensive plan that would coordinate the efforts of national governments, EU stability funds and the ECB itself. For others, it still amounted to yet more words, more jam tomorrow, the kicking of the can a little further down the road. A particular concern was that any buying of sovereign bonds by the ECB would be “focused on the shorter part of the yield curve”. In other words, it would not buy 10- or 30-year bonds, it would support the market for, let’s guess, 6- to 24-month treasury bills (he was not specific). When that penny dropped, Spanish and Italian borrowing costs jumped 30 basis points higher, taking the yield on Spanish 10-year bonds back into the danger zone above 7%. 

Broadly, analysts liked what they heard from the ECB and investors disliked the lack of action today. The debate will surely rumble on through the European holiday month but disaster is no longer imminent.

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Likewise, an investors’ conference in London might turn out not have been the wisest choice of venue for European Central Bank President Mario Draghi’s “whatever it takes” pledge. The day of reckoning has arrived and four horsemen have been spotted in the City, apparently unconnected with the Olympics. Investors are expecting something from the ECB council meeting today. Whilst they have been content in the past with jam tomorrow, tomorrow has now arrived.

An interest rate cut would not do the job. Whether the ECB refinancing rate is 0.75% or 0.25% is irrelevant when Spain is having to pay upward of 6% for its funding. Cheap loans for euro zone banks would be seen as a positive: The Long Term Refinancing Operations (LTROs) around the turn of the year were successful in pushing Spanish borrowing costs lower, even if they left Spanish banks lumbered with even more dubious assets.

A sure-fire game-changer would be a commitment to support – in other words to buy – Spanish and Italian government bonds. The easiest way to do that would be to re-launch Jean-Claude Trichet’s Securities Market Programme (SMP), which spent €200bn on Italian and Spanish bonds. The more controversial approach would be to grant the European Stability Mechanism (ESM) a banking licence. So armed, the ESM could borrow money from the ECB and spend it on Club Med government debt.

If the involvement of the ESM sounds like a fudge, it’s because it is. Germany’s Bundesbank is outspoken in its objection to the idea. It does not believe the ECB should be doing such things either, directly or vicariously. Another obstacle is the Spanish prime minister. If Mariano Rajoy makes no formal request for aid it cannot be forced upon him, other than through the SMP which is ostensibly just a way to “improve the transmission of monetary policy”; in other words, to equalise borrowing costs across the euro area.

The problem would be eased if the Spanish premier were to bite the bullet and apply for a bailout but all the signs indicate that Sr. Rajoy is playing a badminton strategy: if he can lose this round he will be better placed for the next one, when he really really does need the money. 

The non-cooperation of Spain and the objections of Germany put the ECB president in a difficult position today as he negotiates for the release of his hostage to fortune. The global investors who applauded him a week ago will be listening just as attentively today. For Mario Draghi, silver or bronze is not an option.

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That all changed on Thursday when the head of the European Central Bank said in a speech that “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” His fighting talk was backed up by the leaders of France and Germany, who were “determined to do everything to protect the eurozone”.

The euro strengthened on the back of this new determination. Investors are expecting dramatic action from the ECB when its Governing Council meets on Thursday, presumably the buying of Spanish government debt . Until then, investors will probably want to keep their powder dry.

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There was no freshly devastating news weighing the euro down, just the ongoing drip-feed of despair. On Friday the local authority in Valencia said it would need financial help from the central government. Two days later Murcia said it could do with some assistance and Catalonia is thought to be lining up for aid.

Spain is now having to pay through the nose to borrow money; well over 7% for ten-year loans.  Unless the EU and the European Central Bank can come up with a way to re-establish investors’ confidence in the country it looks increasingly likely that Spain will need a full-scale bailout. This continued uncertainty in the Eurozone makes now an ideal time to consider international currency transfers.

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When euro area finance minister met at the beginning of the week they agreed to expedite €30bn of aid to Spanish banks, a third of the amount agreed a fortnight earlier by EU leaders. News that France and Spain would both have to find tens of billions of new savings did not improve confidence in their economies. An admission from the Italian prime minister that his country might have need of bailout assistance did not go down well either.

GBP/EUR is now within three cents of its October 2008 peak close to €1.30. To break above that level will not be easy for sterling. Buyers of the euro should consider making use of a near four-year high.

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Yet again it was developments in Euroland that drove global currency movements. Domestic economic news counted for nothing. Investors spent the first four days of the week transfixed by the approaching summit meeting in Brussels and hoping for the best. On Friday they were relieved to hear that Germany had agreed to hand bailout fund money direct to troubled Spanish banks. Their instant reaction was to buy the euro and commodity currencies, at the same time offloading the safe-haven US dollar.

Yesterday Brussels revealed that euro area unemployment had risen to 11.1%, a record high, and many purchasing managers’ index readings from manufacturing sectors across the zone were more negative in May. For Euroland as a whole the manufacturing PMI was unchanged at 45.1. The euro suffered no major damage but it lost ground to the US dollar and the yen.

The euro did less well against the pound, where it is now back to its pre-breakthrough position. Much of the credit for that must go to the UK manufacturing PMI, which surprised investors when it recovered by almost three points to 48.6, beating even Switzerland’s 48.1. Below 50 it still points to contraction in the manufacturing sector, but these days investors do not look for the best, they look for the least ugly.

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