Bernanke to the rescue as the US offers liquidity to European lenders

Tom Tong01/Dec/2011Currency Updates

Risk returns as Central banks come together to provide much needed liquidity.

USD

The USD was the loser yesterday on what can be considered a crazy day in the market. GBP, EUR and equities all rose from their recent lows erasing some of the USDs recent gains.

The dollar fall was caused by a number of things. Firstly in an attempt to spur lending and spending the People’s Bank of China cut its reserve requirement ratio by 50 points.

The Fed, ECB, BOC, BOE, BOJ and SNB followed suit and announced a coordinated plan to lower the cost of emergency dollar loans by 50 basis points. This will no doubt help European banks as access to dollar funds will free up some of their liquidity.

Next we saw better than expected data. The ADP report indicated an increase in employment from the anticipated 131,000 to a grand 206,000. The previous months figure was also revised up to 130,000.

Also beating forecasts were reports for Chicago PMI and pending home sales. Manufacturing PMI came in at 62.6, up from 58.5 the previous month and pending home sales came in 7 times higher than expected, coming in at 10.4% as opposed to 1.4%.

Today we see the release of unemployment claims and the ISM manufacturing PMI report at 1:30pm and 3:00pm GMT. Worth noting, jobless claims have been below the 400,000 level for the past few weeks and PMI is expected to come in at 51.6, higher than last months 50.8, cue more risk taking and the USD falling even further.

GBP

The coming together of central banks gave GBP a much needed boost against the USD and other riskier assets and currencies.

In terms of data, yesterday saw the release of GfK consumer confidence, despite the index rising from -32 to -31 the downtrend in consumer confidence continues to gather momentum.

Confidence has deteriorated since this time last year with people feeling more pessimistic about the state of the economy and their personal finances. The only positive with regards to consumer confidence is Christmas; individuals should be getting the cheque books out just in time for the holidays.

Today at 9:30am GMT we have the UK Manufacturing PMI report, which is set to bear more bad news and slide from 47.4 to 47.1. An hour after this report we have the Bank Of England Stability Report. In the event positive feedback on the economy creeps out of the report then we should see more demand for the pound.

EUR

Yesterday was a much needed and unexpected good day for the Euro.

The coordinated plan by central banks as previously mentioned will essentially allow the borrowing of dollars at a cheaper rate just in case liquidity runs dry, this will be of great help to European banks.

On top of this and has also noted in today’s report the People’s bank of China cut their reserve requirement by 50 basis points. Many investors see China’s strong demand as a major driver of the global economy therefore anything that is perceived as good for the Chinese economy is good for overall risk.

In the Eurozone itself we saw positive reports out of Germany. Retail sales grew from 0.3% to 0.7% beating forecasts of 0.1%. Unemployment also dropped by 20,000 after increasing 6,000 in September, once again this beat the forecast of a 6,000 decline.

The above clearly helped the Euro but there have been no further developments with the sovereign debt crisis and despite Germany pulling off some impressive statistics the rest of the Euro zone is failing miserably. The Unemployment rate for the Euro zone rose again from 10.2% to 10.3% and Italy’s unemployment rate exceeded the forecast of 8.2%, coming in at 8.5%. Therefore the Euro could be for another difficult day today.

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Written by Tom Tong

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