Draghi faces Bundesbank Threat

With Bundesbank consistently voicing its criticism of the ECB’s latest strategy the German central bank might be taking the battle to the next level, as reports indicate that Bundesbank’s lawyers are checking the legality of the ECB’s bond buying programme. Meanwhile, the situation in Spain remains grim as the government prepares to unveil its fresh set of austerity measures tomorrow. Back in the UK growth fears continue to fade, with yesterday’s data from the BBA showing signs of improvement in mortgage up-take reflecting the positive impact of the lending scheme undertaken by the British government and the BoE.

Pound Sterling – UK Markets

The Pound has steadily declined against the US Dollar, as traders have increasingly switched to safe haven currencies in the midst of growing uncertainty in the Eurozone. Sterling continues to show resilience against the Euro, however, as reports have emerged that lawyers from Bundesbank are verifying the legality of the ECB’s recent bond purchase programme. Meanwhile, a report from BBA revealed an unexpected rise in mortgage loans in the UK for August, reflecting the positive impact of the "funding for lending" scheme undertaken jointly by the British government and the BoE. The optimism was also demonstrated in BoE MPC member Paul Fisher’s statement yesterday, wherein he opined that the lending programme would boost credit supply in the system and thereby remove a key obstacle to economic recovery. Markets will be watching the BoE’s Q3 Credit Conditions Survey for more insights into the UK’s financing conditions. CBI reported sales data remains a key release to watch for in today’s session, in order to monitor the state of the retail sector.

US Dollar – US Markets

The US Dollar continued to move in an upward trajectory against the Euro and Sterling, as traders’ appetite for safe haven currencies grew in the midst of prevailing debt worries in the Eurozone. Moreover, yesterday’s releases continue to offer evidence that the housing recovery in the US remains intact. S&P Case-Shiller home-price index climbed for the third month in a row for July, reflecting the recent improvement in the nation’s home builders’ sentiment and building permits. New home sales data scheduled for release today is likely to reflect the improvement in the housing sector. Meanwhile, Conference Board’s consumer confidence index revealed a sharp uptick for September, signalling that Americans are growing more optimistic about the prospects for employment and business conditions. Next week’s ISM manufacturing data may show a reversal from its recent lows, following data that showed improvements in the manufacturing sector in Dallas, Philadelphia and Richmond. However, Philadelphia Fed President, Charles Plosser, expressed his scepticism over the recent stimulus measures by stating that the Fed’s monetary easing is neither appropriate nor likely to be effective in the current situation.

Euro – European Markets

The Euro continued to fall steadily and slipped below the 1.28 mark against the greenback, as reports indicated that Bundesbank is examining whether the latest bond buying programme falls under the ECB’s mandate. With the Bundesbank Chief continuing to be a vocal critic of the ECB’s latest policy, the divide between policymakers at the ECB and Bundesbank could widen following such a move by the German central bank. To add to the woes, ECB’s Executive board member, Joerg Asmussen, indicated that the central bank would not participate in any potential debt restructuring for Greece. The German, Dutch and Finnish Finance Ministers issued a joint declaration on bad bank assets, setting out the terms under which they would be willing to allow the ESM to recapitalise ailing banks. Meanwhile, Spain faced the brunt of widespread protests, as the government prepares to announce austerity measures tomorrow. Investors are eyeing German inflation data due today to provide cues on direction for interest rates in the near future.

Other Currencies – Highlights

The New Zealand Dollar declined against the US Dollar and Sterling, as data revealed a greater than expected increase in trade deficit for August, broadly due to a fall in exports. The weak trade balance data reflects the impact of slowdown in global growth on the New Zealand economy. Moreover, losses in Asian equities and a weaker opening for European equity markets hurt high yield currencies in today’s session. The Kiwi Dollar also weakened after reports indicated that Bundesbank might be considering challenging the legality of the ECB’s latest bond purchases programme. Markets will be monitoring the business confidence and building permits data in New Zealand tomorrow for further direction. Developments in the Eurozone and economic indicators from the US also are also expected to influence the Kiwi Dollar.