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US stress tests of banks a focal point

The results of the US banks stress testing is expected tomorrow after the markets in New York close- this is to be followed by a press conference from the Banks involved on Friday at which one would assume, they will argue their opposition to the findings. Rumours and articles abound this morning concerning Bank of America with estimates that the Bank will be ‘asked' to get hold of $34 billion of fresh capital following the stress testing. This is about 3 times the original expectation and raises concerns over the total amount that might need to be raised by the other 9 major banks involved. This invoked a move away from riskier currencies and perversely into the US Dollar which enjoyed an afternoon of demand. Equity markets were subdued with a small drop in the DOW recorded. The original stated purpose of the stress tests was to increase confidence in the US banking system, but the market feels like the end result has been almost exactly the opposite.

Sterling has rallied nicely against the dollar on the back of better than expected UK services PMI data for April, which rose to 48.7 from 45.5 in March, some way above the median forecast of 46.3.  It is the highest reading since August 2008. The pound is also gaining slowly against the euro ahead of the ECB rate announcement tomorrow. The markets have already received indications from the ECB president of a rate cut and the possibility of other measures- however with the reserve bank of Australia holding interest rates at 3% could this lead the ECB into a change in sentiment to hold rates? The Norges Bank meet today and are expected to continue their rate cutting regime with a reduction by 50 basis points down to 1.50% anticipated.

In the fx markets the overall general sentiment aside from the stress testing is still motivated by equity movements- the recent increase in risk sentiment has definitely helped any currency with yield- the AUD, NZD and ZAR all performing strongly overall recently and the USD and YEN losing ground. Another mover has been the Canadian dollar which has appreciated 5.5% since mid April- this largely due to Canada holding off the introduction of printing money to buy up debt assets- however a strong currency will dampen the demand for exports in Canada which have already fallen sharply.


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