Market Rumours

Should a bailout of Greece appear, then it cannot be excluded that the market will turn its attention to the state of the UK's national finances says Commerzbank. With this in mind the bank advises against sterling longs. GBP/USD now trades at 1.4968, EUR/GBP at 0.9050.

Sterling continues to be shunned on the foreign exchange markets as GBP/USD skirts the 1.5000 level, but the longer-term prospects for the currency paints an even bleaker picture. See Tuesday's Charting Europe column by Francis Bray.

Brown Brothers Harriman chief currency strategist Marc Chandler says in note that "sentiment on Europe and the UK remains very negative, and market is likely to still favor selling euros and sterling into strength." Echoing this view is Deutsche Bank senior currency analyst Koji Fukaya, who says "the (UK's) uncertain political picture and growing worries over a double-dip recession" may push GBP/USD down towards 1.4500, GBP/JPY towards 132.00; Fukaya adds if Friday's non-farm payrolls paint bleak picture of U.S. economy, fueling risk aversion broadly, GBP selling could accelerate. GBP/JPY last 133.60, GBP/USD at 1.4970.

1-month ATM USD/JPY implied volatilities rise slightly 11.10%/11.80% vs 11.05%/11.75% in NY Monday, as some players buy USD downside hedges despite spot stable in Asia morning. One player bought 6-month USD-put/JPY-call options with 88.30 strike price, around $50 million face value, says options trader at major Tokyo bank. Says after spot fell to near 4-week low at 88.70 yesterday amid mounting euro-zone economic uncertainty, "players are more likely to buy downside protection as any negative factors could trigger the dollar's steep falls." Players continue to watch for any Europe government officials' remarks on fiscally-troubled Greece. USD/JPY last at 89.31.

EUR, GBP down vs JPY on selling by non-Japan banks, due perhaps to grim outlook on eurozone economy, says dealer at major Tokyo banks; but "overall, trade remains thin since this morning as many players stay on the sidelines" before closely-watched decision from RBA's rate-setting meeting. Says an RBA rate hike could buoy risk-sensitive units including AUD, EUR, GBP vs JPY; "the focus is on what RBA officials will have to say about its economic outlook." Says if RBA's stance hawkish with suggestion pace of its rate hikes will be quicker, AUD/JPY may break ceiling of around 80.50, possibly testing 81.00. AUD/JPY last at 80.27; support 79.50. EUR/JPY support at 120.00 vs last 120.81; GBP/JPY's floor at 132.50.

Japan January all household spending +1.7% vs December's +2.1% due to lingering impact of economic stimulus packages including tax-reduction for electric appliances, says Mitsubishi Research Institute chief economist Yoko Takeda; "Japan's economic stimulus measures clearly supported household spending, but the effect may start to recede in the second half of this year." Meanwhile, favorable jobless rate comes as "global economic recovery discourages companies from laying off workers," such as in retail sales sector, says Shinko Research Institute economist Norio Miyagawa. Says even though worst is over for job market, corporate earning still very low, causing jobless rate to stay at current levels.

The pound suffered its worst drop in months, as uncertainty about looming national elections combined with persisting economic problems to spook investors already nervous about the U.K.'s ragged fiscal situation. The pound skidded early Monday in Europe, at one point falling 3% against the dollar to $1.4784 -- its lowest level since April 2009 -- before recovering to finish at $1.4973 in London, down 1.2% from Friday. Sterling is down 7.3% against the dollar this year, and negative sentiment has increased sharply in the past week. Monday's mid-morning fall was the biggest single-session drop in nearly a year, Bank of New York Mellon said. Investors have focused heavily on the euro's problems since Greece's fiscal difficulties surfaced late last year. But the euro, down 5.4% against the dollar this year, has held up better than the pound. While Greece faces tough funding challenges, other members of the euro zone, notably Germany, are in strong enough shape to give Athens assistance should it be required. The U.K. has no such rich relative to help it. Moreover, its fiscal situation has become a double-edged sword, with tensions around the deficit growing as the national election, due by June, approaches. Some market commentators argue that the U.K. must swiftly reduce its deficit to placate restless bond investors who are concerned about the possibility of the fiscal situation eroding even more. At the same time, analysts at Swiss bank UBS AG recently warned sterling could fall to $1.05 or even lower -- if Britain moves too aggressively to cut the deficit. Being too quick to cut spending could shove the economy back into recession, UBS said. Fourth-quarter gross domestic product had a meager gain of 0.3%, supported by government spending, so the fiscal debate remains a sticking point. "You've got negative economic surprises, negative political risks and negative capital outflows," says Monica Fan, a currencies portfolio manager at investment firm State Street Global Advisors in London. "Investors who are concerned about the possibility of a Greek default are increasingly eyeing the U.K.'s high level of public debt and public deficit as a reason to sell sterling." Ms. Fan's reference to capital outflows referred in large part to insurer Prudential PLC's plan, unveiled Monday morning, to acquire American International Group's AIA business for $35.5 billion, $25 billion of it in cash. U.K.-based Prudential will need to convert a large amount of sterling into dollars to make the acquisition, something that investors said amplified negative sentiment around the pound. The political debate has also turned darker now that the quagmire that would be caused by a hung Parliament is considered a realistic possibility after the coming elections. In such a scenario, the winning party still doesn't have sufficient Parliamentary support to carry out its legislative agenda without help from other parties. David Cameron, the leader of the opposition Conservative Party, has watched the disintegration of his once double-digit lead in opinion polls over Prime Minister Gordon Brown's ruling Labour Party. On Sunday, a YouGov poll for the London Sunday Times placed the Conservatives two points ahead. That is among the slimmest of Tory leads since Mr. Brown enjoyed a brief honeymoon after he took over from Tony Blair in June 2007. Because of the way the U.K.'s voting system works, most commentators believe the Conservatives need a 10-percentage-point national lead to be confident of commanding a parliamentary majority. The postelection stakes are large. Credit-ratings agencies have warned the U.K. it could lose its top-notch triple-A rating if the winner of the next election fails to offer a credible plan for fixing the nation's finances. Any new government plan must address what looks like a still-fragile national economy. Economists and traders have started rifling through the speeches of the smaller British parties, since they could hold the key to crucial votes on budget matters. The Liberal Democrats, the country's third-largest party, is seen as the most likely king maker. The Conservatives have pledged to start cutting spending this year, whereas Labour has said such a stance could undermine the nascent recovery. Labour also has promised to protect more government departments from cuts. The Conservatives have given limited details of how they would reduce the deficit, and occasionally have appeared to contradict themselves on when austerity measures would get under way. Many analysts are taking politicians at face value when they say that they understand the gravity of the deficit and will act accordingly. "Both sides recognize that something will have to be done quite quickly to avoid a downgrade," says Kevin Gardiner, the head of investment strategy at Barclays Wealth. The U.K. has lagged behind the U.S., Germany and France in bouncing back from the crisis.

Brown Brothers Harriman chief currency strategist Marc Chandler says in note that "sentiment on Europe and the UK remains very negative, and market is likely to still favor selling euros and sterling into strength." Echoing this view is Deutsche Bank senior currency analyst Koji Fukaya, who says "the (UK's) uncertain political picture and growing worries over a double-dip recession" may push GBP/USD down towards 1.4500, GBP/JPY towards 132.00; Fukaya adds if Friday's non-farm payrolls paint bleak picture of U.S. economy, fueling risk aversion broadly, GBP selling could accelerate. GBP/JPY last 133.60, GBP/USD at 1.4970.

Japan's 4.9% January jobless rate tad better than expected, with Mizuho Research Institute analyst Yusuke Ichikawa saying outcome suggests "Japan's job market conditions have become more favorable." Still, outlook remains cloudy because of a lack of permanent jobs; notes while corporate demand for temporary employment, part-timers increasing slowly, "employment in permanent positions still looks difficult due to the uncertainty over Japan's economic outlook". Expects jobless rate to remain around 5.0% levels in coming months, which historically high for Japan economy.

The level of debts written off because defaulting borrowers will never repay them shot up in 2009, Bank of England figures have shown.In 2009, financial institutions wrote off £4.12bn in credit card loans, up from the previous record amount in 2008 of £3.2bn. The value of mortgages written off more than doubled, but from a lower level, from £408m in 2008 to £984m in 2009.Other loans written off jumped from £3.2bn to £4.2bn - pushing up the total write-offs by UK lenders to people from £6.9bn to £9.3bn.In addition to this, financial institutions wrote-off £5.9bn that was lent to non-financial businesses, as well as £154m lent to other financial corporations.Banks have been revealing their own specific write-off levels during the current reporting season.These institutions set aside millions of pounds to cover potential losses on their loans, but only when the loss is confirmed as unrecoverable is the money finally written off.The effect of the increased losses has been felt by those people who borrow but make repayments on time.It became more difficult during the recession for first-time buyers to get on the property ladder as lenders were making their criteria more stringent.Last month, financial information service Moneyfacts said that credit card rates had risen to their highest level for 12 years - at 18.8%.Bank of England figures suggested the rise was not so acute. It said the average interest rate on credit cards offered by banks and building societies has risen to its highest level since June 2006. At the end of January, the rate was 16.4%.

The Greek government is expected to outline Wednesday a new austerity package of around EUR4 billion in an effort to cut its huge budget deficit by four percentage points this year, government officials said Tuesday."The new package will most likely be announced on Wednesday. First there will be a cabinet meeting to seal the measures and an announcement will follow," one official told Dow Jones Newswires.Another official said Greece's debt management agency is preparing a 10-year bond hoping to raise between EUR3 billion and EUR5 billion."It will be within days of the announcement of the austerity package. Soon after," he said. "We need to go to the market very soon with the 10-year note because we risk ending up with no money." the second official said.Greece's civil servants union ADEDY said that it would stage a 24-hour strike in the middle of the month to protest against the new measures."We are meeting now to decide on the day. It will either be March 15, 16 or 17. The civil servants, which are the lowest paid in Greece, are paying the price for this crisis. Enough in enough," ADEDY President Spyros Papaspyros