Shares of UK mortgage lender HBOS plummeted more than 18% in early London trade on rumors that the company approached the BoE for emergency funding.
â€¢ Japanese Yen: massive swings as risk roils markets again
â€¢ Euro: Gets the benefit of safe haven flows targets 1.5800
â€¢ Pound: Fears of HBOS troubles, BoE Vote push pound towards 2.0000
â€¢ US Dollar: Only MBA on tap
Shares of UK mortgage lender HBOS plummeted more than 18% in early London trade on rumors that the company approached the BoE for emergency funding. HBOS spokesmen denied those rumors but markets remained jumpy and turbulent in the wake of the Bear Stearns disaster, with traders preferring to sell first and ask questions later.
Cable dropped nearly two big figures on the HBOS news while the latest economic data from UK only added insult to injury by showing a slowdown in UK labor markets. UK employment data showed a substantial weakening in labor demand as unemployment rolls were reduced by only -2.8K versus -5.0K expected while wages grew at 3.7% annual rates versus 3.8% forecast. Furthermore, BoE minutes which were expected to produce an 8-1 vote revealed a vote of 7-2 instead suggesting serious concerns about economic growth
Given the recent turmoil in financial markets it now appears that the BoE will be much more likely to ease at the next MPC meeting in April. and if tomorrowâ€™s UK Retail Sales data shows a more than forecast decline, chances of a 50bp rather than merely a 25bp one will increase markedly. Tonightâ€™s news clearly creates additional risks for the pound going forward as UK may become the next G-10 member to follow the US into a recession.
The EURUSD meanwhile enjoyed safe haven status for most of the night nearly reaching the 1.5800 level. The currency now enjoys a 175bp positive spread to the dollar and the EZ economy at least so far has shown little spillover damage from the troubles in US. However, tonightâ€™s EZ Trade Balance which at -10.7 Billion dollars, registered the largest deficit this decade should serve as warning to any euro bull that claims EZ economy will escape unscathed. Tonightâ€™s data showed that export to US declined for the first time in 4 years as the toxic combination of high exchange rates and slowing demand is clearly starting to impact EZ producers.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]