Global Central Banks in move to increase liquidity

Thursday 1st December 2011
Good morning. Risk appetite has returned to the markets after a surprise joint action by the worlds central banks. The FED, the European Central Bank and the central banks of Britain, Canada, Japan and Switzerland agreed to cut the cost of existing dollar swap lines by 0.5% in a bid to help European banks hurt as a result of the euro zone debt crisis. This pushed GBP/EUR down and GBP/USD up as riskier currencies benefited. At 08:30am this morning rates are as follows:

GBP/EUR 1.1651
GBP/USD 1.5660
GBP/AUD 1.5408
GBP/NZD 2.0248
GBP/CHF 1.4288
GBP/CAD 1.5973
GBP/ZAR 12.760
GBP/JPY 121.44
GBP/DKK 8.6590
GBP/NOK 9.0595
• EUR/USD 1.3425

Worlds Central Banks in joint action

You can read a detailed report on what happened with the central bank move here on the Telegraph website, that gives a pretty good summary. The surprise announcement by the central banks yesterday is to create liquidity in financial markets, and it fuelled the market’s appetite for risk and encouraged investors to sell the safe haven US Dollar. The effect on the currency markets was instant – the GBP/EUR rate dropped from €1.1720 to €1.1630 in around 10 seconds, and the GBP/USD rate rose by around 2 cents in just a few minutes.

Many clients have asked why the Pound/Euro rate fell while other rates rose. This is due to risk sentiment. The move created more appetite for risk in the markets, so any currency seen as risky such as the Euro gained on the news, becoming more expensive to purchase. Safe haven assets like the USD and GBP fell, and so we saw the US Dollar become cheaper to buy, but the Euro more expensive.

Analysts said sentiment was lifted by the hope that the plan may limit market volatility and go some way to helping find a solution to the ongoing debt and economic problems in the eurozone. In a separate move, China also said it would free up money for its banks to lend. This move also helped soothe concerns about the speed with which its economy was slowing.

This should, according to policymakers, trickle down and make it easier for businesses and households to get access to finance, giving confidence to the market and larger economy in general. As well as cheaper US dollars, the central banks will also provide easier access for lenders to other major currencies as and when they need it.

Markets have settled down this morning, and rates stand at the levels above at around 08:30 this morning.

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Today’s Data

In the UK today we see further House Price data from the Halifax, in addition to some inflation figures. Australia has some releases today including Building Permits and Retail Sales. In the Eurozone there are various inflationary measures. From the USA we have Jobless Claims and Unemployment data.

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