Prudent(ial) markets
The overnight revelations that Prudential is in advanced talks to acquire the Asian business of AIG, has dominated the proceedings in FX since the Asian open. The deal is worth USD35.5B, of which £25B will be in cash (to be raised by a rights issue). This would make the deal (in terms of cash) the largest UK deal ever. In a market that has been struggling to digest the potential implications of the possibility of a hung parliament and the ongoing negative connotations of a burgeoning fiscal deficit, the news has proven a step too far.
The GBP selling, part of which went through the market on Thursday and Friday last week, has pushed GBP dramatically lower in foreign exchange markets as the huge sell interest has failed to meet matching demand in the uncertain climate. Whilst this has clearly pushed GBP to levels where the long term value is high, the short term picture remains vulnerable as further sales and reserve holdings continue to weigh.
On the data front the UK mortgage approval numbers for January were disappointing but in line with other January lending data and arguably show a market depressed by the weather. Consumer credit and net mortgage lending showed some signs of life however and despite a slight further depreciation of the M4 money supply data, the BoE’s preferred measure of money supply in the economy (a gauge that is critical in the debate on whether to further increase the level of QE going forward). In a further positive sign for the macro economic backdrop of the UK, the manufacturing sector held steady in February from January at its highest level in 15 years, with Exports hitting their strongest on record, finally showing some signs that the depreciation of GBP in 2007 and 2008 are having a more pronounced effect.
Elsewhere, Australian data overnight continued to highlight a buoyant economy, with the trade deficit widening on increased domestic demand and business investment sucking in imports, new home sales surged and manufacturing expanded at it fastest pace in 2 years. The market is now pricing in around 60% chance the RBA raise rates by 25bps at tomorrows meeting.
In the Euro zone the Greece situation continues to dominate with the current moot point being the suggestion that French and German nationalised and private banks are being actively encouraged to purchase Greek debt, ultimately being guaranteed by the national governments, with the markets debating the efficacy and legitimacy on a global scale of such a measure!
This week sees interest rate decisions from the RBA (tomorrow) and the BoE and ECB (Thursday) and Q4 GDP data from Canada, Australia Switzerland and the Euro zone. The flows going through the market however will continue to be the main driving factor of FX rates and we will continue to monitor and evaluate these closely.