Bank stress tests result in volatile euro

Currencies Direct July 18th 2011 - 2 minute read

Late Friday (15 July) saw the release of the widely anticipated results of European banking stress tests. All UK banks passed, with RBS posting the lowest Core Tier One ratio under the so-called adverse scenario. Eight of 90 banks failed the tests, which was around the number estimated before the results were announced but rather worryingly a further 18 barely scraped through.

We expected volatile euro trading this morning (18 July 2011) on the back of the uncertainly that the stress tests provided and that is exactly the case. The euro was off over a cent early in the session but has regained ground over the last hour. The main criticism of the tests is the lack of clarity that the models reveal about the institutions being modelled. The tests did not allow for a default by any of the bailed-out nations (although they would have been run behind the scenes) and many in the market believe getting the information out in the open would be better for the banks in the long-term. Data-wise this week we have the German economic sentiment survey on Tuesday and PMI on Thursday on an otherwise quite week.

US dollar movement is almost all political at the moment. The trinity of Europe debt worries, the impeding debt ceiling hike (or not if certain republicans get their way) and trying to second guess the Fed over QE3 is meaning we are experiencing huge movements in the dollar as new information on each is revealed. Unfortunately we are no clearer to a resolution in any of the main drivers of the USD and we can expect volatile trading to continue. A US default would be catastrophic, but there is a real possibility that it could happen so USD buyers and sellers should keep a close eye on the rate and consider hedging their bets if this continues.

Sterling will spend another week under the radar with a lack of market moving data due this week and the USD and euro hogging the headlines. Wednesday sees the most recent Bank of England minutes released. It will be most interesting to see how the newest MPC member, Ben Broadbent, voted and how the departure of the most hawkish member, Andrew Sentance, is interpreted by the markets.

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