Pound falls again on Banking News

The pound has weakened massively yesterday and again this morning against the USD, AUD, NZD and the Euro on renewed concern the financial crisis in Europe will be prolonged, damping demand for the region’s assets including Sterling. Rates at 08:30am stand as follows:

  • GBP/EUR 1.1101
  • GBP/USD 1.6310
  • GBP/AUD 1.8781
  • GBP/NZD 2.2999
  • GBP/CAD 1.7462
  • GBP/ZAR 12.143
  • GBP/JPY 148.80

Pound falls on Banking News
Sterling dropped against 15 of its 16 major counterparts after the Daily Telegraph said Lloyds Banking Group Plc had been forced to abandon a move to withdraw from the U.K. government’s asset protection plan.

The dollar pared weekly losses against the Australian and New Zealand dollars as Asian stocks retreated, reviving demand for the relative safety of the U.S. currency. The Telegraph article enhanced views the Bank of England can’t exit its accommodative monetary policy stance any time soon, and the renewed concern in this area is weighing heavy on Sterling.

The Telegraph said Lloyd’s Chief Executive Officer Eric Daniels is understood to have presented the Financial Services Authority with plans to raise more than 15 billion pounds. The FSA decided Lloyds would require more capital to withstand rising bad debts and to lend an additional 28 billion pounds to businesses and households this year and next, as agreed with the government.

The pound also weakened after British Bankers’ Association data showed the cost of three-month loans in sterling between banks fell for a 13th day in a row. That spurred speculation and traders sold the pound to fund investments in higher-yielding assets in carry trades.

Bank of England Governor Mervyn King said this week that policy makers may lower the interest rate paid to hold reserves at the central bank, and the market is now focusing on which central banks of the developed countries will be the first to pull out of quantitative easing. It’s not likely to be the UK.

Aussie Dollar & Kiwi Dollar
Falling equities are spurring risk aversion. This is causing buying back of the dollar, which has been used as a funding currency for carry trades. Australia’s and New Zealand’s dollars trimmed weekly gains as technical indicators signaled their advances versus the dollar may stall. Rates for Sterling to these currencies have also dropped, as the pound weakens and these currencies strengthen as investors buy them to benefit from the higher interest rates.

Given the fact that the global economy has not rebounded to pre-financial crisis levels, currencies such as the Australian dollar that have already fully recovered may face headwinds in extending their advances. Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with 0.5% in the UK, 0.1% in Japan and as low as zero in the USA attracting investors to the antipodean currencies higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Todays Data
UK – Money Supply
UK – Public Sector Borrowing
EU – Current Accounts
Ger – Producer Price Index
Can – Wholesale Sales

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