Raphaels Bank Morning Commentary 8th September

publication date: Sep 8, 2008

Australian Dollar 2.1432         Norwegian Krone 9.9168        South African Rand 13.8733
     
Canadian Dollar 1.8784         New Zealand Dollar  2.6073   Arab Emirates Dirham  6.5072
  
Euro 1.2405                           Swedish Krona  11.729           United States Dollar 1.7716
  
Japanese Yen  193.09           Swiss Franc 1.9899                 Hong Kong Dollar 13.8261
  
               
Fannie Mae and Freddie Mac rescue dominates markets.
Principal economic action that is likely to heavily impact the forex markets comes both at the start and near the end of this week.  Macro-economic US financial news dominates this morning whilst the end of the week sees US consumer-focused data and MPC Treasury Committee hearings for the UK. 

Equity market sentiment over the weekend and this morning is extremely bullish in anticipation of a US government conservatorship of mortgage lenders Fannie Mae and Freddie Mac.  Wall Street Futures and the FTSE are already screaming upwards at the start of the London session as investors celebrate the temporary stopgap for the two biggest derivative counterparties in the world.  In line with this sentiment, renewed risk appetite has sent major currency pairs on an upward spike with GBP/USD and GBP/EUR in particular being buoyed up to respective 1.78 and 1.24 levels.  Essentially, the less uncertainty that there is on global markets that a possible global recession will be exacerbated by further credit and mortgage market losses, the more likely it is that Sterling will benefit from some renewed buying whilst EUR/USD gives back some its stratospheric recent gains.  There is little reason though to believe that the rest of the week will bring continued relief for Sterling.  The news over Fannie Mae and Freddie Mac, whilst an excuse to buy on the short-term, will likely dwindle into negativity as investors realise that the move by the US government is only likely to weaken the global economy on the medium and long-term.  What is occurring is really only like the Bear Stearns crisis but on a far grander scale.  Essentially American taxpayers are now exposed to the biggest mortgage book in the world which is rapidly losing vast amounts of cash that may eventually reach up to 300 billion Dollars according to estimates.  If this scenario continues to unfold then we can in fact, ironically expect the Dollar to keep strengthening as US Treasuries are sought out as money leads out of high-yielding and emerging market currencies.

Today also sees UK PPI Output this morning which is very unlikely to make much of a dent in the markets, particularly bearing in mind the main events of data.  What is clear though is that it is highly probably that the PPI and CPI figures will start to pull back over the next couple of months, in-line with market sentiment, leaving plenty of room for much-needed base cuts from the Bank of England. 

Have a good day.