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FX Day Trading - 14 October 2011
G20 finance ministers meet today
Bank recapitalisation will cost €200bn
New downgrades for Spain and UBS
Fearless investigative journalists followed Oliver Letwin, a junior minister in the Cabinet Office, through St James Park for several weeks.
They were horrified to see him discard confidential papers in litter bins. The diligent hacks dutifully collected 100 of the classified documents and published their contents in the Daily Mirror. Among the dramatic secrets they revealed were that a civil servant at the Ministry of Defence had run out of paperclips and that Colonel Gadaffi was a bit of a scallywag.
If they had hung on for a couple of days the journalists would also have been able to scoop the story of Thursday's activity in the foreign exchange market.
They would have unearthed the material for banner headlines such as "European banks to be recapitalised", "Spain downgraded by another ratings agency", "Berlusconi faces confidence vote" and "Currencies don't move much".
One would be hard-pressed to recall a day that produced so little net currency spreads movement.
Dynamo of the day in FX spread betting was sterling, which rose by a staggering 0.3% against the Swiss franc, a little under half a cent. Among major currencies the average net change was 0.1%. Total non-movers were the Australian and New Zealand dollars, which start today literally unchanged from yesterday morning against the US dollar.
Not much to talk about there then. But there have been other developments which could have an impact in the day ahead. Standard & Poor's downgrade of Spain and Fitch's downgrade of UBS are two of them.
Never mind that S&P is simply mirroring an earlier decision by Fitch, or that UBS is just one of more than a dozen banks to have suffered a downgrade during the last week: the ratings agencies clearly do not share the spread betting market's confidence that a recapitalisation of European banks will be the panacea it is cracked up to be.
It will be expensive too. The BBC reports that the European Banking Authority will require banks to maintain capital of between 9% and 10% of risk-weighted assets*. The assumption is that the money – some €200bn of it – will have to come from governments because banks will be unable to raise the cash from private investors.
Without an injection of government cash banks would simply reduce or reallocate their lending so as to bring their capital ratios into line with the new criteria. When economic growth is so desperately needed that would not be the desired outcome.
G20 finance ministers will gather with trepidation in Paris today to discuss the world economy. Sixteen of them will be having a go at the other four, demanding that Eurozone leaders get their act together and sort out the crisis that threatens them all.
Anticipation of that meeting will overshadow activity today, even though there can be no realistic expectation that it will deliver anything useful. Euroland's balance of trade and inflation figures, Canadian manufacturing shipments and US retail sales will just be so much noise. Have a good weekend.
* A bank's assets (loans) are graded according to the risk of them not being repaid. Simplistically, a £10,000 loan to Joe Bloggs for a new car is weighted at 100% so the bank will have to allocate £90 or £100 of capital under the proposed rules. A similar-sized loan to triple-A Exxon has a 20% weighting, meaning that only £18 or £20 of the bank's capital must be set aside. Loans to AAA governments, such as Britain and Germany, are zero-weighted; the bank can lend them infinite amounts of money without any impact on its capital usage.
Currency Trading and Spread Betting carry a high level of risk to your capital and you can lose more than your initial investment, they may not be suitable for all investors. Ensure you only speculate with money that you can afford to lose and that you fully understand the risks involved and seek independent financial advice where necessary.
The above content does not constitute investment advice, it is provided purely for information purposes and is delivered as a personal view of the writer. Neither the contributing company (or writer) nor Online-Spread-Betting.com accepts any responsibility for any use that may be made of the content.
'FX Spread Betting: GBP/CHF Spreads Climb Higher', Article by Moneycorp, last update: 14-Oct-11
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