Currency market updates - from Foreign Currency Direct (www.currencies.co.uk)

Tuesday October 2nd 2007

By James Lovick - Desk Manager

Snapshot

GBP vs USD  -0.25%
GBP vs AUD  -0.75%
GBP vs NZD  -1.15%
GBP vs EUR  +0.08%

On a day with few data releases the pound saw an uncertain start to the week.
The biggest movers for the pound were against the antipodean currencies with sizeable losses against both the Aussie and Kiwi dollars.

The pound pushed early on to a 2 month high against the US dollar although those gains had been lost by midday. Against the euro there was little change by close of business. The European data in the form of Manufacturing PMI came out as forecast and the markets did little to react. Similarly the UK version came out slightly weaker than expected but with little reaction.

Solid as a Rock???

The main news was that of Chancellor Alistair Darling trying to restore public confidence in the banking system after Northern Rock's near-collapse.

Until now, the government guaranteed the first 2,000 pounds of savings and then 90 percent of the next 33,000 pounds, for a maximum of 31,700 pounds.

Darling said "Today I can announce the Financial Services Authority has increased the limits of the Financial Services Compensation Scheme so that it covers from today in full the first 35,000 pounds of people's deposits in any institution at 100 percent." He added that he wants up to £100,000 to be guaranteed but new laws are needed to raise the threshold that high.

Meanwhile, shares in Northern Rock - which have been volatile since its problems became public - fell 20% yesterday.

UK Housing Market Stagnates

Sterling probably remained under pressure after British mortgage withdrawals for house purchases fell in August to their lowest since April.

The numbers suggest that recent interest rate hikes and increasing pressures on affordability have taken their toll on the housing market.

Data from Hometrack showed house prices were unchanged for September, the second flat reading in a row.

Whispers are now going round that the Bank of England may be looking to cut rates possibly as early as this year. One could not entirely rule out a rate cut later this week; overall there is likely to be some further speculation of cuts. While discussion of this nature continues the pound is likely to remain under pressure. If we do see these rate cuts then we could see further losses for the pound.

More Casualties in Credit Crunch

Two new banks have fallen victim from this credit crunch. Firstly is UBS (the world's largest wealth manager) with losses of US $3.4 billion.

Secondly is Citigroup, the US's biggest financial group, taking a$3.3bn hit for sub-prime mortgages.

The subprime crisis in the US is not over yet and the whole trouble surrounding Northern Rock highlighted how vulnerable the UK financial system may be to external factors. Until this clears up the volatility is likely to continue. What will come out next?

Later today

Data is largely European based with PPI data and Unemployment figures for August out at 10:00. There is little out of major importance now until Thursday with the UK and European rate decisions.

Interestingly the Bank of England will be holding a second auction of £10 billion today in the three-month interbank market, despite there being no takers at a similar auction last week. Any takers could highlight further weakness in the system, which may weigh heavy for the pound.