US housing market shows signs of recovery as European bond yields drop

Tom Tong21/Dec/2011Currency Updates

GBP

Yesterday, the Bank of England confirmed they were making preparations to support UK banks in the event of a break-up of the Eurozone, deputy governor Charlie Bean, described the present state of the single currency area as a “worrying situation”. The bank has introduced a temporary loan facility as a precaution, for use in the event of contagion from the Eurozone crisis endangering British institutions. In light of this Moody agreed yesterday that Britain has upheld its current AAA rating, the agency believes that for the time being Britain’s economy has a number of strengths – it is competitive, has a flexible currency and loose monetary policy, however this could be short lived as the UK’s worsening economic outlook and health of its public finances could lead to the country being stripped of this prized ‘safe haven’ status.

Sterling hit a session high against the Dollar, rising around 1 percent yesterday due to year-end corporate demand and better risk appetite that contributed to general dollar weakness. Gains against the dollar pushed the pound to its highest level against a currency basket since early March. With investors flocking to the UK currency yesterday, this sent Sterling to an 11-month high against the euro, believing British assets to be a safe haven from the Eurozone’s festering debt crisis. Traders believe the Pound’s gains versus the Euro mainly reflected continuing worries following the European Union summit earlier this month which is seen as having failed to come up with a firm, immediate plan to solve the debt crisis.

EUR

The single currency rose above $1.31 for the first time in a week but later retreated. A successful Spanish Bond auction for 3 and 6 month bonds lead to a fall in Spanish Bond yields. Italian and Spanish government 10-year bond yields have fallen to around 6.62 percent and 5.14 percent respectively, moving further away from the levels above 7 percent that were widely seen as unsustainable. Stocks and commodities began an end of year rally on Tuesday when German data encouraged hopes Europe’s largest economy would avoid a recession. German Data, the IFO unexpectedly rose to 107.2 in December from 106.6 which was the biggest rise since February. The Euro also strengthened on the back of increased risk sentiment after positive US housing data.

The ECB will offer banks unlimited amounts of low-cost, three-year funds against collateral now more broadly defined, which many analysts hope will encourage buying of high-yielding Spanish and Italian bonds, helping ease the crisis in the euro bloc. Sources in Milan have told Reuters more than 10 Italian banks, including major lenders, were looking to apply for the ECB loans by using state-guaranteed bonds as collateral. But it was also likely that some banks would use the funds to repay their own debts as they strive to get rid of bad assets and improve their balance sheets amid strong regulatory pressures to beef up their core capital.

Analysts say the long-term ECB loans will lower the cost for euro zone banks to borrow euros in the open market, but won’t reduce their dollar funding costs.

USD

Data showed US housing starts jumped 9.3% in November, its highest level in well over a year. This is an encouraging snapshot of the US housing market, which has been in the doldrums for years. This led to an increase in risk sentiment and thus a shift from the safe haven Dollar and towards riskier assets such as the Euro. The dollar index, which measures the US currency against a basket of six other currencies, declined to 79.871 from 80.374 on Monday. A depreciation of the dollar is usually seen as reflective of improving appetite for riskier assets among investors, as the currency often acts a safe haven in time of market anxiety.

Print

Written by Tom Tong

Vestibulum id ligula porta felis euismod semper. Donec ullamcorper nulla non metus auctor fringilla. Cras justo odio, dapibus ac facilisis in, egestas eget quam. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Donec ullamcorper nulla non metus auctor fringilla.