European Stress Tests Fail To Impress

Proceedings in currency movements today were expected to be dominated by market reactions to the results of the European banking stress tests. The tests which revealed that only seven of the ninety-one banks failed have drawn criticism for not being strict enough. The next few days should reveal whether the stress tests have managed to build investor confidence in the Euro but further to a short lived strength after the announcement late on Friday, the Euro has shown volatility against the US Dollar and Pound rather than building any strong gains so far.

Pound Sterling – UK Markets

TThe Pound has performed particularly well against the US Dollar since Friday no doubt due to the Q2 GDP figures released on Friday which smashed through economists’ forecasts of 0.6 percent by coming in at a surprising 1.1 percent. This has added weight to Monetary Policy Member Andrew Sentence’s conviction that interest rates should start to rise sooner rather than later but he’s still alone in his urgency so no change is expected in the short term. BP’s chief executive Tony Hayward has stood down following the wide spread criticism of his handling of the recent oil spill – BP are all also preparing their accounts which may reveal the worst ever quarterly loss for a UK firm. Business Secretary Vince Cable has announced that moves will be taken by the Government to put more pressure on to banks to increase lending to small firms. The Pound seems to be withstanding a 0.1 percent fall in Hometrack’s housing figures for July released yesterday trading at 1.5485 against the US Dollar and 1.2003 against the Euro at 10am this morning.

US Dollar – US Markets

New home sales data being released today may add to the current run of gloomy economic data in the US although economists are slightly more optimistic predicting a 5 percent rise for June following May’s shock 32 percent fall. It is also predicted however that reports this week will confirm that the US economy expanded at a much slower pace in the second quarter as consumer spending slowed and the trade deficit swelled. Friday this week will be a crucial day for the Dollar as GDP figures are released. Although the European stress tests are coming under intense scrutiny there seems to be no news on the horizon that could re-build confidence in the US Dollar which may continue to lose out to the Euro.

Euro – European Markets

The stress tests were coordinated by European Governments to reassure investors about the health of banks after the bonds of Greece, Spain and Portugal have suffered due to the debt crisis. The results released on Friday however showed that a mere seven of ninety one banks failed the European stress tests, underwhelming analysts and causing focus to shift to whether or not the tests themselves were suitably rigorous. One of the main issues has been that the tests did not assess the majority of banks’ holdings of sovereign debt. The tests took into account only potential losses on Government bonds the banks trade rather than those they are holding until maturity. Only Germany’s Hypo Real Estate Holding AG, the Agricultural Bank of Greece SA and five Spanish savings banks lacked adequate reserves to maintain a Tier 1 capital ratio. The amount of capital required is much lower than expected totaling 3.5 billion Euros – about a tenth of the lowest analyst estimate. How this will affect the Euro will continue to play out as markets take their position now that European trading is open for the week but there have been no particularly strong gains so far.

Other Currencies – Highlights

The European stress tests have kick-started a rally in Asian currencies alongside further evidence that the economic recovery is well in tact in the region. The Singapore Dollar has risen for a fifth day leading gains in Asian currencies as risk appetite and confidence in emerging market assets was boosted by the stress tests. The South African Rand has reached its strongest levels in more than two months after interest rates were kept unchanged and gold and platinum prices rose. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.