RISK AVERSION REACHES NEW CRESCENDO - DOLLAR FLIES
Currencies tied to any level of perceived market risk were burnt into the ground yesterday as the financial world was shaken by two major artillery shells. The first and the most damaging of the two was the news that AIG Group incurred the biggest ever US Corporate loss in history, a frankly inconceivable sum of 61 billion Dollars. The second was word that London-based HSBC Group was all at the ready to try and shore up its dwindling capital base with a monster 12 billion Pounds rights issue. Combined, these two announcements were monumental in gravity, meaning only one thing to investors – ‘run’. And run they did, with the FTSE plummeting to fresh ten year lows of 3600 as the S&P in the US did the same. As we have come to expect, crashing equity burnouts invariably also equate to stark sell-offs in risk-associated currencies, so the Pound unsurprisingly lost a tremendous amount of value over the day.
GBP/USD and GBP/EUR, the latter being thrashed particularly hard by a general overall high-appetite for Dollars, both whimpered to 1.40 and 1.11 levels respectively at close of play. Being driven by the rule that, ‘if it’s bad for the global financial economy then its worse for London,’ how could we have expected Sterling to react any differently? The UK currency, over the last number of years has quite simply been hyper-inflated by the success of London in providing a hub for the co-joining of global industry. If any Initial Public Offerings had to be made, if any Mergers & Acquisitions were on the horizon, or indeed, if you wanted your company in the thick of the action, London and the UK was the place to be. Now, if what they’re shouting from the rooftops is true, and the depression is going to last for years and not months, then GBP/USD and even GBP/EUR can be expected to have a bit of a slog in any bounds to make a recovery anytime soon.
Despite the four horsemen taking a clear fancy to the UK currency as a snack before they continue their tour of the world, there is still plenty of hope for GBP/EUR, even after a day like yesterday. Fans of the European Union will be most upset to learn that yesterday saw the rejection of a proposed 200billion Euro bailout of its Eastern bloc as EU officials snubbed the plan largely over regulatory restrictions. This is bound to put even more stress on the single currency in time, particularly with the exposure that Central Europe has to Asia on top of its Eastern neighbours. Word also that the Bank of England may surprise us all on Thursday by a hold on interest rates, largely with a view to protecting spreads on Bank mortgage lending could also be a salvation for GBP this week as this would certainly prompt some paring of interest rate bets as well as presenting a bottom of the current down-cycle in the interest rate curve. Eyes will certainly be peeled for this at the end of the week.
Overnight saw a paring of shorts on emerging market and higher risk currencies, mainly as a result of an over-extension of moves yesterday, but also thanks to a hold in rates by the Reserve Bank of Australia which spurred some move back into carry trades. In turn this has brought GBP/USD back up to 1.41-1.42 with GBP/EUR also managing to cling on to the 1.11 level. This afternoon and late this morning will probably see a resumption in risk aversion though, with US Pending Home Sales being likely to spook investors once again. Expect 1.40-1.42 on GBP/USD and 1.11-1.12 on GBP/EUR.
Raphaels Bank - CFX Market Report Headline Animator
