EQUITIES MOVING AND ECB MAKE FOR A HEAVY DAY ON MARKETS

EQUITIES MOVING AND ECB MAKE FOR A HEAVY DAY ON MARKETS

Stalemate was the key word for markets yesterday. EUR/USD, a big driver of major Sterling currency pairs, remained almost entirely undecided on direction for the day, as investors remained ambivalent on political proceedings this week, despite US corporate behemoths GM and Chrysler looking increasingly likely for a juicing by the bailiffs. EUR/USD remained around the 1.30 – 1.31 level for most of the day with close of play looking to be moving in the Dollar’s favour at around the 1.30 level. GBP/USD, as expected, moved up towards the 1.44 level in the morning, helped by some reasonably improved UK Manufacturing data, before ebbing its way towards the mid 1.4350 region for close as traders positioned themselves for today’s events.

Currently though, we have one situation counteracting another in terms of FX drivers. Under normal conditions, sentiment surrounding the two US motoring giants could be expected to fuel some hefty Dollar strength, however, the spectre of US money supply expansion combined with desperate hope over the G-20 is keeping traders from bundling into the currency. In fact, what could be unfolding could be considered epic in proportion as the Euro and the Dollar fight it out over which is more attractive in terms of capital preservation and future growth potential. Tomorrow will certainly be a help in settling this argument, at least for the short-term. Any view given by the ECB which may suggest that the Central Bank is entirely happy with keeping quantitative easing firmly off its agenda could certainly prop up EUR/USD and shield GBP/USD from losses whilst damaging GBP/EUR. However, if investors consider that the Eurozone may be running the same risks of monetary inflation and devaluation as the US in the not too distant future, with the ECB deciding that it has to consider an expansion of its money supply, then the Euro could take a dive. This would benefit GBP/EUR heartily but may spell bad news for GBP/USD.

We will therefore be watching Europe very closely today. There is little doubt that base rate for the region will be cut by 50 basis points. This is however of no concern in light of the Bank’s Press Conference following its decision (1:30 PM GMT), where its views on policy will be aired. As said above, dovishness could prompt some big moves, but hawkishness, with the Bank being belligerent regarding inflation risk, may not shift markets a great deal. Thus far today though, a good spread of decent economic data for both the US and the UK, including a very promising UK Nationwide House Price Index, at its best level since October 2007, are pulling equities up and giving all Sterling pairs some decent velocity. Expect GBP/EUR to hold around 1.0950 – 1.10 before the ECB announcement with GBP/USD moving around 1.45-1.47.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx


This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

US POLITICAL ACTIVITY CONTINUES TO LEAD MARKETS

US POLITICAL ACTIVITY CONTINUES TO LEAD MARKETS

Financial markets were gripped once again by the zeitgeist of fear yesterday as investors decried comments by the US administration regarding the likelihood of more bank bailouts being on the horizon. In essence, where many commentators jumped on the optimism of last week to call a bottom to the markets and negative growth, Obama and his pals have very kindly reminded them that the grim reaper is still thirsty for blood. In addition to whimpering fear over the main political pronouncement, equities also took a further spanking thanks to news that both General Motors and Chrysler, being two of the biggest and most highly inter-linked companies in the global economy have been denied a rescue by the US Government and now have only one last chance to formulate a viable plan to keep the companies liquid.

As we have come to entirely expect, the current market formula for economic bearishness was followed in response to the above: the Dollar and the Yen were snapped up, with the Euro, the Pound and other riskier currencies being dropped. However, mere weeks ago, the flow into US Treasuries and the Dollar in general would have been much stronger if it weren’t for the Fed’s quantitative easing programme being rolled up. This is what, even in a week where the European Central Bank is fully expected to drop its base rate once again, is keeping the Dollar from bounding all the way back to yearly highs across the Board. The game can therefore be said to be shifting somewhat – so don’t expect the 1.20s on EUR/USD again anytime soon.

However, the ECB could surprise the market into some heavy volatility later in the week. If the Central Bank even squeaks about potential for future expansion of money supply to put a rocket up its regional coffers, the Euro could be sold dramatically. This could quite feasibly drop GBP/USD back down sub 1.40 and give GBP/EUR a shot in the arm to above the 1.10 level. The next couple of days will most likely see market consolidation ahead of what will certainly be a very unpredictable and potentially powerful event.

Today sees fairly little in terms of mainstream economic data. UK Consumer Confidence, released this morning, has given Sterling some good support though, being a much more positive figure than expected, buoyed by a relaxation in general mortgage payment levels over the last month. Expect the rest of the day to see fairly little activity though with GBP/USD likely to stay within 1.42-1.44 and GBP/EUR looking like moving around 1.07-1.08.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx


This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

FED PLAN HAZY - GBP/USD STILL GLIMMERS

FED PLAN HAZY - GBP/USD STILL GLIMMERS

The upshot of yesterday’s main event, a fresh and seemingly vigorous new plan by the Federal Reserve to purge the US banking system of its dirty assets, was pretty stale. The scheme, which involves flushing out around 1 trillion Dollars worth of questionable, mainly mortgage-based, instruments by using Government loans to encourage uptake, is theoretically powerful, but sadly lacked the practical technicalities to spur investors into the monster equity rally which we half-expected. Despite being formally vaunted by US Treasury Secretary Timothy Geitner the whole operation simply has not captivated investors enough on the short-term to extend last week’s rally against the Dollar and into equities and riskier market assets. It is simply too vague at the moment and will have to be much more fleshy before it gives the markets enough strength to jettison more Dollar holdings and US Treasuries in favour of the belief in an impending bottoming out of negative growth and the return of cheap equities.

The result of the above then was a very lacklustre day on currency markets. The wild-eyed fervour of last week which saw bumper sell orders on the Dollar was trumped by ghostly silence as traders bemusedly decided to pare bets instead of overextend themselves in a market that has come a long way in a very short time. As EUR/USD fell back to 1.35 from 1.37, it wasn’t necessarily that Dollar-based risk aversion had taken hold again, but more that speculative positions had been pared, for now. GBP/USD, as we would have expected, also pulled back from 1.46 to 1.44, driven by the proxy effect of the Dollar in its own right.

GBP/EUR, currently suffering terribly under the weight of the newly popular single currency moved down to the 1.06 mark as a poor show by the FTSE added to the Pound’s struggle. As we continue to comment though, GBP/EUR will only conceivably experience a hearty renaissance when the ECB, at the very least, shows itself to be intending on joining the global Central Bank money-printing brigade. Currently the single currency is too well insulated in terms of its corresponding monetary policy to be scared by the Pound even if global financials bounce.

Today will likely see another push on GBP/USD as investors tentatively adopt stock market positions and look at emerging market equities further to yesterday’s events. GBP/EUR should also gather some small momentum as a barrage of Eurozone manufacturing data this morning brings the Continental region back into the limelight. Expect a top of 1.4750 on GBP/USD and 1.0850 on GBP/EUR for the morning ahead of some extremely important UK-events including CPI and Inflation Report hearings. Further to these, which may highlight the growth of inflation at a faster pace than expected, Sterling markets may be tentative for the rest of the day.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

As anticipated, prices on Sterling pairs relaxed yesterday. GBP/EUR and GBP/USD both drifted slightly upwards as a proportion of big speculative positions being run against the UK currency were closed in the absence of any further major market negativity. Market close saw both pairs left fairly unchanged on the day though at 1.0850 and 1.3850 respectively. In terms of data, the morning did see UK Manufacturing Production, although this didn’t manage to prompt any further heavy staking of positions, despite the figure showing an unbelievably steep contraction of -2.7% in February.

The Manufacturing figure is extremely troubling though, especially given the case continually made by the Government until very recently that Pound depreciation and a competitive UK export sector would heavily support industry this year. If, as we all already know, financial services are swallowed up in the Government’s debt-riddled black hole of bureaucracy, then it is the country’s strength as an exporter that is going to be put to the test in terms of GDP output for coming years. The balance between the two is clearly shifting, and, unlike say Germany, which has a history of comparative advantage for its extremely high quality industrial equipment, the UK quite simply has fairly little to offer. A culture of consumption driven by a hyper credit bubble and an almost complete reliance on global services has left the UK looking pretty naked and alone in the current climate where cash is being hoarded and debts are being called in on a global scale.

So the current question of the moment is with regard to the short and medium-term trajectory of the Pound. The bigger picture is that the UK’s balance sheet is currently ballooning with all variety of defunct credit instruments and new gilt-based debt, all being replaced by fresh notes straight from the printers. This could be good for currency value – if investor belief is that it will kick-start an economy to action. It could though, be very bad for currency value if the view is that the debt is being created but can never be easily serviced or repaid. On the short-term, the current mood is dictating the latter, but on the longer term the former will probably be the reality.

The rest of the month sees a whole smattering of data from the UK, all of which will be bad, with very little from Europe. GBP/EUR can therefore be expected to move between 1.06 and 1.13 for March-April. Onwards from April will be likely to yield upwards of the 1.15 mark as the European Central Bank moves its effective base rate to zero and considers some type of quantitative easing for the summer. From then on, making the assumption that London can still maintain status as the global financial capital, higher rates could be possible. GBP/USD will probably take a fairly similar root, but will be under much more pressure from a continued Dollar strength as the Euro continues to take the strain.


Rapahels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVT VACUUM

FAITH AND HOPE DWINDLE AS BANK SECTOR IS SUCKED INTO GOVERNMENT VACUUM.

Remember Reagan’s famous quip about the nine most terrifying words in the English language? ‘Im from the Government and I’m here to help’ was the infamous line. What a wonderful phrase that was for yesterday’s events with both Lloyds Banking Group and HSBC moving to seek more assistance from taxpayer insurance schemes for bad debt in response to mounting funeral pyres of ‘toxic’ assets. Then the terror came. A huge equity sell-off saw the FTSE plunging down toward the 3500 mark in as the animal spirits of investors were whipped into frenzy over the clear damage of the public sector-led bailout to the future health of the economy. UK Financials in particular were hit very hard over worries that some Banks may be entirely nationalised, with the rest shrinking beyond recognition over coming years as the global financial crisis continues to swing its scythe.

GBP/EUR managed to finish the day around the 1.09 mark with GBP/USD barely recovering to 1.38 having tested the 1.37 levels. As commented on Monday, if any selling was going to be prompted on Monday, it was going to have potential for explosiveness with a lack of any other real data for market players to fight over. In such dark times though, it may provide some balm, for those on the front-line of the currency markets, to have a concerted consideration of the metaphysics of the situation. By this, we refer to what is really at stake beneath the whole hyperbole of frantic analysis of growth, economies, toxic-debt, value destruction etc.

The media, as a reflection of the hopes and fears of society in general, cannot stop bewailing the destruction of all of the above, but what do these categories really mean? As should be relatively clear, markets are made up of assets, although, in fact, the market is itself an asset, it is an ideological asset. Hyper-speed Capitalism, just like the myriad of products it has created is designed for growth. It was designed to offer an alternative to the boom and bust Keynesian markets of the early twentieth century, as well as to offer an opponent to the Socialist model of the same era. However, like the products it produces (i.e currency prices, equity prices, bond prices, house prices) it is first and foremost a system of the mind – it requires belief and co-operation to be sustained. The UK economy is actually quite unique in that it requires belief and co-operation of an explicitly financial nature to be sustained at past levels (bearing in mind the huge proportion of GDP for the UK in past years coming from the financial sector). What is being reflected in currency markets at the moment is therefore, truly special.

Investors are mulling over the very future of London and the UK in a potentially, completely different ideological and regulatory environment – whether or not anyone has real faith remains to be seen. The problem with falling currency prices is the same problem that began the whole economic slump in the very beginning – it is one of over-extension and over-consumption leading to loss of faith, which then leads to over-extension and over-caution. This system should normally, obviously, be self-correcting. However, in a current climate where the structure of the system is being shifted, in terms of private giving control over to public (which is currently most extreme in the UK) then there is little knowing how the situation may change.

Today will see GBP/USD and GBP/EUR holding at the 1.38-1.39 and 1.08-1.09 levels respectively before UK Manufacturing Production data this morning, which is likely to show further massive curtailment for UK Industry. However, considering the velocity of yesterday’s sell off on the Pound, the rest of the day will probably see some stabilisation and profit-taking with possible slow movements back upwards on both pairs.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY.

POUND WELL HUNGOVER FROM WEEKEND OF BANKS BINGEING ON GOV MONEY

Foreign exchange markets last week continued to be structured by high Dollar demand as fear over the inefficacy of Central Bank measures to calm the global economy, combined with terrible data on the state of real economies, continued to boost the currency. Despite a small but sharp sell-off on Friday after US Non-Farms, showing a monthly decline of 650,000 jobs in the US, the currency still found favour thanks to its position as the world’s main source of capital funding and its current status as an asset haven which is running in a now largely divorced relationship from the actual performance of the American economy.

Dollar pressure contributed hugely to a considerable decline in GBP/USD over the week, which retreated heavily from a push to the 1.44-1.45 area at the beginning of the week to hold at the psychologically important 1.40 mark at its end. However, as very poor performance over the week from GBP/EUR showed, Sterling put in an extremely poor show in its own right. Despite the European Central Bank being very dovish in a forecast for its interest rate curve on Thursday, the market’s main concern was focused on the health of the UK economy in light of the Bank of England commencing its first ever quantitative easing programme this month. To put it simply, Sterling investors are concerned over two dangers that accompany measures to try and enhance UK money supply. The one is that the measures, which are beginning at the creation of around 100 billion Pounds of gilts, will be very difficult to control in the long-term, possibly leading to unbridled inflation. The second is simply that the measures will have no effect and are actually indicative of an economy sliding into the abyss.

However, despite the above, GBP/EUR has still managed to hold itself above the 1.11 mark for open this week. This reflects, first and foremost, the appalling outlook on an extremely weak Eurozone and a highly questionable recent history of European Central Bank Policy. Secondly though, there is certainly an argument out there at the moment that, given the dilapidated nature of the global outlook, the Bank of England may simply be ahead in a game of last resorts to stoke a failing economy. If this proves to be the case and conditions do continue to deteriorate, then, while Sterling may not rebound on the short-term, it certainly has girding for the medium-term.

Following a further increase in the UK Government’s stake in Lloyds Banking Group over the weekend, Sterling will probably take a short-term pasting this morning. Though the currency will probably recover later in the week, the lack of any major economic data today to turn investors attention elsewhere, a focus on the UK Governments fiscal strains and falling credit rating will probably push GBP/USD sub 1.40 again with GBP/EUR likely struggling to hold onto 1.10.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

NEW TERRITORY FOR BOE MEANS POSSIBLE NEW HORIZONS FOR POUND

NEW TERRITORY FOR BOE MEANS POSSIBLE NEW HORIZONS FOR POUND

The Bank of England announced yesterday that it would be utilizing its first raft of Quantitative easing measures, essentially creating money and using the funds to stimulate economic growth by purchasing government and corporate bonds. The UK also saw its benchmark interest rate cut to its lowest-ever level of 0.5 % from 1% with the European Central Bank also cutting by half a point to 1.5%.

BoE policy-makers are hoping that buying government securities, which will be done to a total of 75 Billion Pounds-worth over the next three months will encourage more liquidity in the economic system as a whole as money supply increases and prices expand from the top-down. The move reflects a conviction that the standard policy tool of short term interest rates has become increasingly ineffective. Purchases will be focused on corporate credit markets, so as to improve lending to the private sector, and medium- and long-term government bonds. The BoE said it would "monitor the effectiveness of this purchase program in boosting the supply of money and credit and in due course raising the rate of growth of nominal spending, adjusting the speed and scale of purchases as appropriate. With the latest 0.5% reduction, the BoE rate is rapidly approaching that of the US Federal Reserve, which has set its benchmark at a range from 0 to 0.25%.
In Europe, the ECB's reluctance to bring down interest rates more quickly has attracted widespread criticism from economists, who argue that the economy of the 16-nation euro zone is contracting so sharply that little would be lost by lowering borrowing costs faster. Senior officials on the ECB's rate-setting Governing Council are split over where to go next. Athanasios Orphanides, the central bank governor of Cyprus and a former economist at the Federal Reserve, has emerged as a spokesman for considering pushing short-term rates down fast and considering new policy tools. The German members of the council, Jürgen Stark and Axel Weber, have been more skeptical and have tended to worry that ultralow interest rates helped cause the current crisis in the first place. On Thursday, the European Union's statistics office confirmed its earlier estimate that quarter-on-quarter GDP in the euro zone shrank 1.5% during the October to December quarter, after a 0.2% drop in the previous quarter.

The FX market reaction to the above events was fairly muted, with most fun being had on equity markets with main indices across the world dipping sharply in response to a general despondency over the potential efficacy of the Central Bank measures. The reduction in both European and UK interest rates was widely anticipated by speculators and interest rate futures which resulted in very little overall movement with GBP/USD continuing to hang on to the 1.41-1.42 mark and GBP/EUR looking sheepish around 1.12.

Data out today is mainly US based with Non-Farm Unemployment and the US unemployment rate both out at 2:30 GMT, both of these are expected to be negative and may therefore prompt some dollar weakness in the run upto the afternoon. This may however fade into Dollar strength though as Dollar-denominated market positions are pared for the weekend and as the potential horror of the US data sinks in prompting some heavy risk aversion trades. Expect GBP/USD to continue in its channel of 1.41-1.43 for the day with GBP/EUR possibly testing 1.1150.

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.

RISK AVERSION REACHES NEW CRESCENDO - DOLLAR FLIES

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.