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Pound Drops as UK Seeks To Stabilize Banks

Last updated 1/19/2009 5:04 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK Bank rescue plan puts 50 Billion GBP to insure toxic assets, seeks to spur lending
• US markets closed for MLK
• Asian and Europeann equities up modestly on Obama inaguration
• UK's Brown - deleveraging and national only solutions as dangerous as protectionism
• Oil steady at $36/bbl
• Gold slightly lower at $838/oz.

Overnight Eco

• AUD MI Inflation Gauge -0.2% vs. -0.6% last
• GBP Rightmove HPI -1.9% as pace decline slows
• JPY Revised Industrial Production -8.5% vs. -8.1% forecast
• CHF Retail Sales decline -1.4% vs.a forecast of 1.5% gain

Event Risk on Tap

• CAD Foreign Securities Purchases expected at 1.0B

Price Action

• USD/JPY relatively steady at 90.60 as equity action muted
• AUD/USD trades either side of 6800 as risk appetite remains steady
• GBP/USD shellacked by the impcat of UK banking plan
• EUR/USD gaps higher on the open but drops below 1.3300 as pound action worries over Ireland weigh

Not a pleasant start of the week for pound bulls with cable crushed on the open of London trade, falling nearly 300 points from the day’s high in response to the second version of the  UK rescue plan of its banking sector. The plan announced by UK Chancellor of Exchequer Alistair Darling proposed creating  an insurance scheme to underwrite  the toxic debts on the books of UK banks. The scope of the program could reach 50 Billion pounds. Additionally UK authorities increased the government stake in RBS to 68% from present 58% share. UK PM Gordon Brown went out of his way to criticize the RBS  management, noting that the bank was wholly irresponsible it its investment decisions and that most of its losses came from its exposure to US mortgage backed securities as a result of RBS’s acquisition of ABN-Amro. However, Mr. Brown’s most salient point in the press conference came when he noted that the global economy now faces a risk  as great as that of trade protectionism as a result of what he called, the problems of deleveraging and nation-only solutions. It will be interesting to see if other world leaders, most specifically President elect  Obama will follow Mr. Brown’s clarion call for much greater international coordination on the global credit crunch problem.

For the time being, currency markets, shocked by the massive size of the RBS loss which reported the largest corporate losses in UK history remained  skeptical of the    efficacy of the UK plan and sold the pound unremittingly from the start of London open. UK policy makers face  a daunting task as they try to recapitalize their banking system and spur lending.  Indeed PM Brown is correct that the problem is beyond the scope of UK fiscal and monetary authorities and will require coordinated policy responses from all G-4 members.  

Unfortunately, such international cooperation does not  seem likely. Even in the EZ, national tensions have come to the surface with today’s Daily Telegraph carrying the headline, “Help Ireland or it will exit euro, economist warns".  As the economic situation in EZ worsens  backlash towards the euro is sure to increase putting further stress on the single currency.

The net impact of today’s news appears to favor the greenback simply as the least worst of all other alternatives. With all US capital markets closed for MLK holiday, trading is likely to be muted but the focus will remain on the pound as the day wears on.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.