Papademos apointed Greek PM as MPC hold further QE

Tom Tong11/Nov/2011Currency Updates

GBP

Sterling edged higher against the dollar after the Bank of England fulfilled market expectations by keeping interest rates and asset purchases on hold, but the pound slipped versus the euro as the common currency broadly rebounded.

The Bank of England voted to keep interest rates at a record low 0.5 percent and opted not to raise the amount set aside for the quantitative easing programme designed to breathe life into the country’s fragile economy.

This was widely anticipated by the market, and given the BOE did not produce any surprises like expanding its asset purchase plan, it drove the pound slightly stronger versus the dollar.

Meanwhile, the average price of a home in England and Wales rose 0.2 percent from September to 220,056 pounds, the groups estimated in an e-mailed report in London today. The number of transactions fell 5.7 percent. In London, prices rose an annual 2.5 percent in the three months through October.

“With a slowing economy, squeezed real incomes and high inflation, there can be little expectation of any rapid recovery in the housing market,” Acadametrics Chairman Peter Williams said. “There is a great deal of uncertainty but the simple fact is that there is a growing population and a shortage of housing supply — an imbalance which will underpin property values into the future.”

Britain’s economy is at risk of slipping back into recession as the euro-area crisis intensifies. The Bank of England kept its target for bond purchases unchanged yesterday after increasing it in October, and the European Commission said a contraction in at least one quarter “cannot be ruled out.”

EUR

Yesterday the Euro regained some of its losses after the sharp slides seen on Wednesday. Greece appointed Lucas Papademos as its new prime minister, and markets reacted positively to this news as it ended some of the political uncertainty which had surrounded Greece after the resignation of George Papandreou. The Euro was also buoyed by news that Standard & Poor confirmed that France would retain its AAA rating.

In other good news, 10-year Italian bond yields were on their way down, hitting a daily low of 6.76%, after having hit an intra-session high of 7.4% yesterday, following a successful auction which saw healthy demand.

While political developments were positive, analysts are sceptical that they would be enough to spur a sustained drop in Italian bond yields or a rise in the euro.

“Euro, to me, is still very much a sell on rallies,” said Mitul Kotecha, head of global foreign exchange strategy for Credit Agricole CIB in Hong Kong, adding that his bank’s forecast was for the euro to drop to $1.33 by year-end.

“I still think it’s going to be some time before we see a sustained drop in Italian bond yields,” he added.

Market positioning in options suggests that investors are bracing for a further slide in the euro, with euro/dollar one-month risk reversals quoted at 4.25/3.75 in favour of euro puts.

That is close to the extreme levels seen back in September, before the euro hit a nine-month low of $1.3145 in early October.

In a sign of bearish sentiment against the euro, some traders said hedge funds have recently bought euro puts with strikes around $1.26 that are due to expire in six weeks.

USD

The US trade deficit narrowed for the third consecutive month in September on growing exports and shrinking imports indicating the world’s largest economy may be poised to strengthen. A sustained decline in applications for unemployment benefits may be the first step to a pickup in hiring that’s needed to spur household purchases, the biggest part of the economy. The result was traders jettisoned risk assets in favour of the dollar on European debt concerns. Markets should be quiet today due to being a national bank holiday as the Americans remember those who have fallen on Veterans Day.

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Written by Tom Tong

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