Forex Market Update - 22 April 2009

US Treasury Secretary Timothy Geithner’s contribution last night showed a marked improvement from early performances and his comments produced the desired effect. Testifying before a Congressional panel he assured that “the vast majority” of the top US banks have more capital than they needed to overcome the current situation and that the TARP still had around $135 bln available, enough to “do the job” in his opinion. His comments contradicted the Monday rumours that had decimated Wall St and the financial sector, and also overshadowed more gloomy reports from the IMF and S&P.

The IMF, in its Global Financial Stability Report, cautioned that global write-downs could reach $4.1 tln while the losses on US-originated assets were likely to be $2.7 tln vs. a January estimate of $2.2 tln. With regard to the UK, the report claimed that the UK faces a GBP200 bln bill for the bank bailout plan, a number that saw the Treasury rushing to say the figure was “wrong” and contained errors. The UK Times reports that the IMF may face the embarrassing situation of having to withdraw its claim in the report. Nevertheless, the timing of the release of the huge number ahead of the UK budget today would be a serious blow to the UK Chancellor, facing the biggest budget deficit in the post-war era. The Chancellor is expected to give a much lower estimate of the cost as between GBP50-60 bln.

The UK budget will obviously be a major market focus today with the funding numbers expected to climb higher, and growth numbers seen falling lower. The FT estimates that the Treasury would have to issue some GBP200 bln worth of government bonds this financial year, some GBP50b higher than DMO estimates just a month ago (note the March PSBR/PSNCR data is scheduled for release this morning before the budget, with PSBR seen rising to GBP15.5b from GBP9.0b last). As regards growth, in the November pre-budget a contraction of 0.75-1.0% for 2009 was forecast but the deterioration since then suggests the numbers are likely to be closer to -3.0% for this year. Latest BOE projections are for a 3% decline this year and a 2.3% rebound in 2010. More likely a more modest 1%+ figure may be forthcoming from the Chancellor. His main task will still be to convince investors, traders and his own government that the UK remains fiscally responsible and has the means to stabilize the economy short-term without jeopardizing the future.

Yesterday, the Bank of Canada reduced rates to a record low 0.25%, slightly surprising the markets which had been split between a cut and no-change. Post-meeting comments confirmed that rates would remain at these low levels through June 2010, with the benchmark rate now at the “effective lower bound”. GDP growth forecasts for 2009 were also slashed to a contraction of 3% from 1.2% previously. The details of its quantitative easing framework will be released on Thursday with the Monetary Policy Report. The CAD saw a kneejerk sell-off, and hit a 3-week low against the dollar just above 1.2500, however the reversal in risk appetite soon saw the pair retrace the move, and more.

In Euro-land, ECB council member Weber commented that the ECB had “marginal” room to cut interest rates further, but added that they should not go below 1%. On the Euro-zone economy he was considerably downbeat, saying that the Q1 decline was “somewhat stronger” than in Q4 and there were no clear signs yet of a leveling off. He noted that there was some hesitancy in the banking system to enter into long-term refinancing due to the uncertainty about future rate direction. He urged the ECB to send a signal once rates were at their low point, and will stay there for some time, to encourage more longer-term refinancing.

In the data events so far today, Australia’s Q1 inflation report saw a better than expected q/q number (+0.1% q/g vs. +0.5% expected) and the annual number was also dragged lower to +2.5% y/y and is now within the RBA’s target band. However, core inflation remained stubbornly high due to smaller than usual post-Christmas discounting, coming in at 4.15% from 4.35% prior and an expected 3.9%. As such it remains above the RBA’s target 2-3% band but, these days, unlikely to raise any concern. AUD showed little reaction, a kneejerk dip finding bargain hunters and was left ranging for the rest of the session. Other data confirmed the deteriorating labour environment down under, with the skilled vacancies index down 8.9% in April, and down a hefty 61.8% on the year.

The rest of today’s data slate is commandeered by the UK, with a string of releases followed by the budget later. GBP stands to be the most volatile currency today, with the downside likely offering the path of least resistance.