Pound plumbed a 27 day low in early Asian trade after a rumor that an Aussie regional bank was in trouble triggered another wave of risk aversion selling, but the rumor proved false and cable was able to stabilize and bounce.
- Japanese Yen: trades either side of 115.00
- Euro: ZEW worse than expected
- Pound: Roller coaster ride off NR problems, inflation tame
- Dollar: FOMC and PPI on tap
Pound plumbed a 27 day low in early Asian trade after a rumor that an Aussie regional bank was in trouble triggered another wave of risk aversion selling, but the rumor proved false and cable was able to stabilize and bounce. A positive open on the LSE and news that BOE infused more than 4.4 GBP into the money market helped to ease concerns stirred by the Northern Rock drama which continued to play out on television screens across the world.
UKs fifth largest mortgage lender saw no respite from customer outflows as crowds continued to surround it braches looking to withdraw deposits. Despite assurances from UK authorities that all deposits will be guaranteed NR customers rushed to retrieve their cash, partly due to the fact that after the initial 2K UK law only guarantees 90% of the next 30K on deposit. The unintended consequences of this regulation is to cause a bank run as most depositors fear losing 10% of their money that is not guaranteed.
Although cable managed to rebound off the lows its long term outlook remains problematic, as interest rate policy expectations have made a 180 degree turn in the past two days. Rather than anticipating a rate hike to 6%, speculators are now looking for a possible rate cut to 5.5% before year end. Tonights tame core CPI reading which printed 1.8% vs. 1.9% projected offered ample ammunition to the doves on the MPC to consider such a course of action given the turmoil in UK banking.
Meanwhile, in Euro-zone the ZEW survey printed weaker than forecast registering its worst reading since records began in 1999. The news clearly indicates that growth in the region is slowing and is likely to have peaked. Under these conditions the ECB will have a very difficult time forcing another rate hike on the market. Thus, although the Fed may cut rates by 25bp later today, the fallout for the dollar should be minimal as the monetary policies of its major trading partners no longer look so hawkish.