FX & MM : “Sterling stays firm as Fabio’s men slump” by Philip Ryan

Towards the end of last week concerns over debt crept back into the market psyche. It marked a disappointing end to the week which started so positively in response to China’s de-pegging of the CNY. The good news didn’t last as it became evident that there was still plenty of two-way risk on the CNY. Other key events were a new PM in Australia, who faces a difficult start in office over the contentious new mining tax and the G20 summit in Canada which took place yesterday.

The US Assembly confirmed a major regulatory reform bill towards the end of the week and markets, especially financial stocks, reacted positively as the bill appeared to give some support to banks and was not as brutal as feared. However, equity market drive has clearly faded against the background of new growth concerns including developing evidence of a double-dip in the US housing market in addition to fresh worries about the European banking sector. In line with the bearish news, US Q1 GDP was accordingly revised lower once again, to a 2.7% annualised rate of growth.

Recent US data has managed to hold back the USD, suggesting that cyclical factors and not just risk aversion are beginning to play into foreign exchange markets. This can be seen with Cable breaking through the key 1.50 level and even the flagging Euro is reaching nearly 1.24 against the greenback at the time of writing. Cable has found further support with talk in the market that a UK clearer needs to buy cable today for dividend payment purposes. The effect is not likely to be excessively large, however it may well be helping underpin the pairing in recent trade.

Sunday saw the biggest non event after a certain football match with the G20 summit which like England, the communiqué failed to get a grip on challenges that face them. Maybe a little harsh as they agreed new targets for reducing deficits and sovereign debt, however questions regarding tougher capital and liquidity requirements for banks were delayed until November’s summit in Seoul, providing leaders with time to work out their individual differences.

All in all, economic data this week is unlikely to lessen growth concerns, with Euro zone, US and UK consumer and manufacturing confidence indicators likely to post declines due to a host of factors. The data will suggest a slowing in growth momentum following Q2 2010, in the short term turning lower, albeit gradually. Whilst a double-dip scenario still seems doubtful there can be no doubt that austerity measures and the weakening of fiscal stimulus measures are starting to weigh heavily on global growth prospects.

Report by Philip Ryan at Currencies Direct