Today’s FX View from IB:
While it might be a stretch to state compassion for any global finance minister, Britain’s Alistair Darling attempted to win over critics and court marginal voters as he delivered a hefty 50% tax on bankers bonuses over £25,000 ($40,000) starting today for four months to the end of the fiscal year. The pound immediately responded relatively positively to a pre-budget report today that has to navigate some rocky waters: On the one hand there is a sense of urgency to address a blowout budget deficit – the sideshow of the global meltdown. While on the other the government faces defeat in an early summer election next year if it can’t stimulate the economy.
British pound – Chancellor Darling today told Parliament that he expects the government’s stimulus measures to get a grip of the British economy next year and expects GDP growth of between 1-1.5%. For 2011 he expects a 3.5% growth rate, although might not be in office to take delivery of it. Gaming lovers probably welcomed the relaxation of taxation at bingo halls while the chancellor also confirmed the reintroduction of value added tax (VAT) at the traditional 17.5% rate after its recent 2.5% reduction to help consumers weather the storm.
The pound lost earlier gains against a weaker dollar midweek and currently buys $1.6285 while the euro buys slightly more sterling at 90.66 pennies.
U.S. dollar – The dollar index is lower on Wednesday after a bout of risk aversion earlier accounted for a surge in both the dollar and the yen. The revelation of a $3.5 billion loss at the property arm of Dubai World’s Nakheel on Tuesday was well-timed to coincide with Fitch Ratings downgrade to debt issued by the Greek government. The broad feeling displayed by investors jumping from riskier currencies back into more typical safe havens seems to run along the lines that sovereign debt crises are the last thing the delicate economic recovery around the world currently needs. With an estimated $12 trillion government tab for bailing out the world’s leading nations, one can see how the world can be successfully rescued by piling up IOU’s for the next generation. The weaker fiscal stance around the world may yet become the next shoe to drop, but one already has a sense that should the issue arise, someone will step in to spend more and more until the problem rectifies itself.
According to media reports treasury secretary Geithner will today notify Congress in a letter that he is extending the government’s TARP program through October when the program expires on December 31. With an initial $700 billion price tag the program has been far less fiscally onerous now that banks are scheduling repayment programs. In fact this week the treasury said that the ultimate cost predicted in August of $341 billion overstated the true cost by $200 billion. Total bank TARP repayments – including the scheduled Bank of America repayment – stand at $116 billion. And so today the fears that the Greek downgrade generated yesterday, the TARP extension is removing today at least as far as risk appetite goes.
Japanese yen – The yen jumped overnight following an alarming downwards revision to the third quarter pace of growth through September. Even though economists had made only conservative revisions to what was a thumping 4.8% annualized pace of growth, the revision caught investors seriously on the hop. The outcome at 1.2% annualized was less than half the 2.8% prediction by forecasters. The blame fell on the slashing of corporate spending, which is worrisome in the ongoing deflationary environment. The yen continues to rally and stands at ¥87.96 per dollar and ¥129.81 per euro.
Euro – After its weakest close in two months the euro is rallying against the dollar and stands at $1.4717. But ahead of a stock market opening where optimism is fading as predicted by almost flat S&P futures, the midweek session currently looks to be lacking in inspiration.
Aussie dollar – A decline in Westpac’s consumer sentiment index accompanied a fall in lending to homeowners. The local dollar is higher on the day at 89.84 U.S. cents where plenty of analysts say investors should be ‘buying the dip.’ The loss of its recent appeal stems from the possibility that the RBA may leave interest rates alone for at least a couple of months, while the broader risk aversion topic has seen investors ditch the Aussie until they feel they can justify stepping back in. Friday delivers the nation’s employment report and current expectations center around the creation of an additional 5,000 jobs.
Canadian dollar – Canada’s dollar is rebounding from yesterday’s losses as it got roped into the bout of risk aversion based selling. The Canadian dollar reached 94.46 U.S. cents pre-equity market opening but has subsequently fallen to 94.09 cents.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.