Currency Statement is wintery in its bite

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There is a lot to get through from yesterday and so we might as well get George Osborne’s statement out of the way and save the political ding-dong to the people who enjoy that sort of thing. The fact is that the Autumn Statement had very little impact on the markets with sterling and gilts actually rising on the day versus the US dollar and euro. Europe remains the number one concern for the markets at the moment it seems and even though we saw growth rates cut for this year to 0.9 per cent from 1.7% in March and for 2012 to 0.7% from the earlier forecast of 2.5%, the market remains happy to be long sterling.

One thing that George Osborne hung his speech on yesterday and, to a certain extent since he came into office, was that the UK would keep its credit rating at AAA. A shot was fired across the UK’s bows last night by Fitch however with ratings agency warning that while “policy response does demonstrate a continuing commitment to placing UK public finances on a sustainable path…….. the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its ‘AAA’ status has largely been exhausted”. In layman’s terms it means that should we see a big bank topple over or the fallout from a European implosion reaches our shores then we may see that rating downgraded. I think this is less of a problem than most people anyway. Our AAA rating is only still in place as a result of our central bank being independent and the same explanation can be given for why gilts are so highly sought at the moment. As long as we have a central bank that has an unlimited backstop of cash to fall back upon, a slight change to our credit rating would not be the end of the world. Sterling was also little moved on the Fitch statement.

Another ratings agency got more press last night by acting on the worldwide banking sector. S&P reviewed the ratings of 37 major banks around the world after changing its model to reflect the funding risks of individual countries. Not all banks were downgraded but the major ones to be affected were Goldman Sachs, Bank of America, Morgan Stanley and UBS. This happened after the market close and while the shares are not trading at the time of writing we have seen moves back into haven currencies overnight.

Part of this may be as a result of, although the Eurogroup meeting last night signed off on enhancements to the EFSF, leveraging of the Fund will fall short of the EUR1trn that had been expected (preliminary estimates put the number somewhere closer to EUR600bn). We also saw that the latest Greek loan tranche was approved, with disbursement expected by mid-December although this is of little consequence in the short term and is little more than a shot of painkillers to a terminally ill patient.

Italy’s debt auction was predictably expensive yesterday with all rates auctioned exceeding 7%. The funny thing is that the market looked at the auction and said that “as long as it was not above 8%, that’s relatively ok”. Strange days. Even so, these funding levels are of course unsustainable and will lead to more pain further down the line for Italy.

There are no bond auctions to worry about today however we still have a raft of data from the continent. German unemployment is due to remain at 7.0% when released at 8.55am with the entire EU figure due at 10am. Here in the UK there is a general strike occurring of public sector workers as a result of changes to their pension pots. This is unlikely to have too much effect unless things get out of hand and a protest turns into a riot.

Indicative Rates Sell Buy
GBPEUR 1.1698 1.1724
GBPUSD 1.5525 1.5549
EURUSD 1.3256 1.3279
GBPJPY 121.00 121.27
GBPAUD 1.5589 1.5613
GBPNZD 2.0486 2.0515
GBPCAD 1.6067 1.6096
NZDUSD 0.7569 0.7589
GBPZAR 13.06 13.11
USDZAR 8.4145 8.4432
GBPPLN 5.3123 5.3418
EURJPY 103.28 103.54

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