Rumour of Franco-German deal steals limelight

Market participants have been positively surprised by reports indicating that France and Germany have reached an agreement to enhance the Eurozone's bailout fund to €2 trillion, in a bid to tackle the sovereign debt crisis in the region. Additionally, reports suggesting consensus amongst France and Germany on bank recapitalisation plans have eased worries about the European financial sector. The gains in the Euro were despite a downgrade of Spain’s credit rating by two notches to “A1”, from “Aa2”, by Moody's Investors Service (Moody’s). The Euro is expected to trade higher against Sterling in the near term, amid rising market expectations of a positive outcome from the European Union (EU) Summit scheduled on 23 October 2011.

Pound Sterling – UK Markets

Sterling has weakened against the Euro, this morning, as sovereign debt concerns in the Eurozone eased, on reports of France and Germany having reached an agreement to enhance the European bailout fund. The minutes of the Bank of England’s (BoE) latest monetary policy meeting, just released, indicate that policymakers voted unanimously for restart of quantitative easing, and considered injecting even more than the £75 billion agreed. This could lead the Pound lower, against the Euro. Meanwhile, Bank of England Governor, Mervyn King, has cautioned that the global recovery is faltering and indicated that UK’s monetary policy is limited in its capacity to revive the nation’s “reluctant recovery”.

US Dollar – US Markets

The US Dollar has weakened against Sterling and the Euro, this morning, amid a rebound in investors risk appetite. Preference for high yield currencies rose, following a report that Germany and France have agreed on an arrangement to boost the Eurozone rescue fund to €2 trillion. Moreover, investors are anticipating a positive outcome from the weekend EU summit. Market worries over the US economy slipping into the recession have eased, after the Federal Reserve Bank of Atlanta President, Dennis Lockhart, stated that recent economic reports have been brighter than expected, and that he does not foresee a double-dip recession. The US Dollar movement against the major currencies is likely to be directed by further cues from the US consumer price report and the Federal Reserve’s Beige Book survey, scheduled for release later today.

Euro – European Markets

Reports that France and Germany have reached an agreement to bolster the Eurozone's rescue fund to €2 trillion as part of a “comprehensive plan” to resolve the sovereign debt crisis, has led the Euro higher against the US Dollar, this morning. We expect this trend to continue in the near term. Additionally, the Euro found support against the US Dollar, on positive comments from Moody’s yesterday, that the European Central Bank (ECB) has ‘very substantial’ capacity to shore up the banking system, and that the ECB might take additional steps to shield the economy. However, the Euro witnessed intense volatility overnight against the major currencies, after Moody’s downgraded Spain’s credit rating by two notches to “A1” from “Aa2”. Yesterday, the German Chancellor, Angela Merkel had indicated that the upcoming EU summit would mark an “important step”, though not the final one in solving the region’s sovereign debt crisis.

Other Currencies – Highlights

The Aussie Dollar is trading higher against the US Dollar, this morning, on higher risk appetite amongst traders, following reports of the Franco-German bailout deal. Moreover, data indicating an improvement in Australia’s leading index in August, and gains in Asian equities, coupled with a firm start to the European equity markets, further boosted demand for the Aussie Dollar. The Aussie Dollar found support from the statement of Chinese central bank adviser, Xia Bin, who indicated that Chinese growth is “sound”. The Reserve Bank of Australia Assistant Governor, Guy Debelle, has assured markets about the health of Australian banks by stating that the central bank is not seeing the same sort of stresses for Australian banks, as are present for some of the European banks. We expect the Aussie Dollar to trade higher against the US Dollar in the near term.