IB FX View

Hotel California for Britain’s black horse

Friday September 18, 2009

The pound took a battering this morning falling to $1.6273 while the euro appreciated to buy 90.35 pennies as allegations emerged that Britain’s Lloyds TSB bank failed to raise enough external capital to allow it to exit a government scheme to protect shareholders from the toxic assets on its balance sheet. The news reported by two national newspapers puts the issue of the health of the banking system front and center in the minds of investors days before a G20 meeting in Pittsburgh at which European governments have already indicated the need to bring the issue to the fore.


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Apart from inherent weakness in the British pound, the dollar faced a little respite from the selling pressures it faced throughout the week. Today it has recovered from a midweek decline to $1.4767 against the euro to around $1.4710 today. The dollar rose sharply on Friday morning against the Canadian dollar sending it down to 92.86 U.S. cents before the Canadian fought back to its present 93.56. The decline in the price of crude oil by 1.7% was also accompanied by a rise in copper inventories that spooked copper longs.

Metals prices sagged a little as the dollar rose while investors continued to reassess the demand for higher-yielding assets. The question they face after London copper stocks rose for a sixteenth day was who was going to use increasingly expensive raw materials. The recovery might yet suffer should commodity prices stifle input demand. The string of gains for copper held at London warehouses was the longest since January and lifted stocks to the highest volume since May.

The desire to hold commodity currencies faces a test in light of growing evidence of hoarding. They are also hampered by the overbought crowd who argue that recent gains in many currencies would benefit from some exhalation allowing them to enter as prices dip lower. The Australian dollar today slipped to 86.85 U.S. cents after an earlier high this week at 87.76 cents.

Lloyds Bank, whose symbol is a rambunctious black horse, finds itself in the safe environment of the government’s very own Hotel California these days. They checked in to the comfort and safety of a cozy government suite to help regain shareholder confidence when the financial storm was showering meteors on them. But what are the chances of ever checking out?

London’s Financial Times said that the lender doesn’t have the capital to quit the government’s asset insurance program that protects £260 billion of its toxic assets. Six months ago Lloyds paid a £15.6 billion fee payment to the government to gain that protection, which raised the government’s stake from 43% to 62% at the time.

European Union rules surrounding state aid are provoking the lender to balk at the plan. Lloyds has been crippled by its acquisition of mortgage lender, Halifax and under current rules it may be required to sell some body parts including branch offices. But to replace the current insurance under the government’s Asset Protection Scheme it’s estimated that Lloyds would need to pay a non-government agent as much as £25 billion and media stories say they simply can’t raise it.

The weakness in the value of the pound today reflects growing fears for the health of the banking system and underscores earlier concerns raised by the central bank about the failure of individual banks to lend more as the credit markets began to function normally. Clearly the British economy has its challenges ahead and that is once again being assumed by investors concerned about the safety of the pound sterling. Adding to those concerns today was the largest monthly budget deficit registered since records began in 1993. The August deficit came in at £16.1 billion compared to £9.9 billion in August of 2008.

The dollar rose against the yen today to clear the decks after a string of losses lifting the value of the yen to ¥90.12 midweek. The dollar has so far rebounded to ¥91.50 at its best on Friday. Incumbent Japanese finance minister, Fujii speaking to reporters in Tokyo refused to answer question about the benefits of a strengthening yen. He said that to answer such questions would label him as a supporter of a strong yen. Rather he said that currency rates should be left to reflect the economic fundamentals. Earlier in the week, the yen gained on speculation that his comments concerning his desire to see no government intervention to stem yen appreciation. The euro also gained marginally against the yen to stand at ¥134.36.


Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com       


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