The three-day Wall Street rally, firmness in commodities and weaker dollar came to near-term halt late Friday, even though US data held nothing to really disappoint.
US housing starts were bang in line with expectations at 598k (the previous month was revised up to 589k), initial jobless claims showed a mild improvement to 545k from 557k though this was countered by an increase in continuing claims to 6230k from 6101k.
Later, the Philly Fed index echoed the improvement seen in the Empire State manufacturing index earlier in the week, with a spike up to 14.1 from 4.2 previously, knocking market forecasts of 8.0 for six.
It was a Forex session of negative developments for GBP during the Asian session. Having been a notable laggard to other majors’ gains against the dollar over the last few days (since BOE Governor Mervyn King’s testimony on Tuesday), GBP was pressured again following the publication of a story in the WSJ suggesting GBP could emerge as the new funding currency for the carry trade.
To make matters worse, the UK Telegraph carried news that Lloyds Bank had failed the FSA stress test as it failed to raise enough capital to meet the Financial services authority’s strict requirements, effectively dashing its hopes to withdraw from the government’s toxic debt insurance scheme.
Despite Lloyds’ plans to raise GBP15 bln through a rights issue, preference share conversion and subordinated debt buy-backs, the FSA calculates much more is needed to withstand escalating bad debts as well as the additional GBP28 bln of lending to households and businesses over the next two tears, as agreed with the government. GBP/USD sliced through the 1.64 support level with ease and dragged other majors lower with it.
In developments in the commodities world, talk was circulation in Asia, based on a Dow Jones report, that the IMF was to discuss on Friday plans to sell a portion of its gold holdings as a way of diversifying its income sources. The IMF is the third largest official holder of gold reserves in the world and a sale of 1/8th of its holdings (as rumored) would be the equivalent of 12.97 million ounces. Is it coincidence that gold failed to make headway past the early high of 1,023 yesterday in Europe? Gold was not particularly active during the Asian session, holding above 1,008-1,010 support.
As the new Japanese cabinet get their feet under their desks ahead of the very long weekend, finance minister Fujii enhanced his status as a fiscal disciplinarian by announcing his aims to secure savings of several trillion Yen by cutting wasteful spending from the current fiscal year’s extra budget of JPY14 tln.
As a result, he said a cut in the planned issuance of JGBs was an option. He was non-commital on whether an additional budget may be needed for the current fiscal year, but new Strategy Minister Naoto Kan said such a move may be necessary.
As we head into the weekend, we have a relatively barren data slate. German PPI and Euro-zone current account data kick off the European session with UK public finances also on tap.
Recall the government deficit has seen some dramatic jumps in the last few months, and another one is forecast for August – more pressure for GBP? The BOE also releases its trends in lending report while North American releases are limited to Canadian wholesale sales.
