Foreign Exchange Insight : Panic Subsides and Appetite For Risk Floods Back into Global Markets as Federal Reserve Confirms Low US Interest Rates Until 2013

10 Aug 2011 at 6 AM - Written by John Cameron

STORY LINK Foreign Exchange Insight : Panic Subsides and Appetite For Risk Floods Back into Global Markets as Federal Reserve Confirms Low US Interest Rates Until 2013

The Pound Euro exchange rate (GBP EUR) is 1.1350. The Pound Dollar exchange rate (GBP USD) is 1.6280. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5720.

Panic is, by its very definition, an emotional state that can only prevail for a very short period of time. It was, therefore, perhaps inevitable that the febrile behaviour of stock market participants in the early part of this week, which saw the Dow Jones share index record its sixth largest daily loss in history on Monday, subsided yesterday.

In London, the FTSE 100 share index closed up by almost 2% during yesterday’s session. This movement was continued when the North American markets opened, with the Dow Jones experiencing a major rally to close up by 3.98% and the broader-based S&P 500 experiencing even greater gains to move forward by almost 5%.

The US share indicies had opened up and gained further positive momentum when the US Federal Reserve stated that it would be maintaining interest rate at their current band of 0.00-0.25% until 2013, at least. Previous FOMC statements had stated that rates would remain low for an ‘extended period’, which was too open-ended for the markets’ liking.

So, with the Federal Reserve continuing its ‘cheap money’ policy for the next two years and share markets likely to be the major beneficiaries as investors seek out at least some return to protect them against the ravages of inflation, the good times look set to roll on for equities investors. All that they require now for the party to begin again in earnest, is for the Fed to confirm that it is making money even ‘easier’ by ramping up its Quantitative Easing programme with the introduction of ‘QE3’. This is something which was not mentioned at all by the Fed last night.

Meanwhile, yesterday saw wild movements on the currency markets, with the GBP CHF rate dropping to its lowest level on record to trade down to 1.1467 as panic gripped the markets and investors sought out a safe haven, prior to the forward move for equities. The GBP CHF rate has since recovered by over 3c.

Elsewhere, as appetite for risk flooded back into the global markets yesterday afternoon, the high-yielding currencies surged forward, seeing the GBP AUD, GBP NZD and GBP ZAR rates strongly reject the multi-month highs that they reached in the early hours of yesterday morning. The GBP AUD rate ended the session over 7c off its daily high and the GBP NZD and GBP ZAR rates recorded similar losses throughout the day.

However, the fundamental drivers which caused the sell-off in higher-risk asset classes remain, with fears over the Eurozone and US sovereign debt situations and economic data releases suggesting that global economic activity may be slowing. It is possible that the great equities sell-off of 2011 may not yet have fully run its course.


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