It looks like we’ll have a decision on the automakers bail out via a Congressional vote today but a positive outcome is by no means assured. As we all know, the first vote for the TARP was rejected over partisan infighting and may hinder this bill’s progress also. Provisions have also only been made for $15bn as supposed to the $34bn that was originally asked for; the remainder relies on a series of accounting tests that are far too boring for this time of morning. In any case, this does not change the risk atmosphere a jot and will likely not provide sterling any support against the dollar.

The flight to safety that the US dollar has benefited from over the past 5/6 months was shown in a stark light by 2 news articles yesterday. Firstly, the implied yield on US Treasury debt was -0.01%, a phenomenon that hasn’t happened since 1940 and signals exactly how desperate investors are for a return of their capitals as supposed to a return on it. The Treasury sold $30bln worth of debt in the past 4 weeks and will have to pay no interest to the buyers. The second article shows us that the cost of insuring British government debt is more expensive than insuring the debt of McDonald’s; I always knew one of them was full of rubbish but now I’m not sure which. The simple explanation is that in this imperfect market pricing anomalies are going to happen and should equalise over time.

The Bank of England are not the only central bank to have cut rates to almost historic levels recently as the Bank of Canada cut rates by 75bps; a 50 year low. The loonie was hammered 1.7% lower against the dollar but although weakening against the pound immediately following the announcement it has since strengthened back into its recent trading range.

One reason for the overnight sterling weakness, which has seen it hold at its record lows against the euro, could be the NIESR’s GDP estimate. They believe that growth slowed at twice the rate in November as it did in September (-1% vs. -0.5%) with most of the falls seen in the ailing car sector as well as publishing and metal products.

With it being an almost non-existent data day today we would be wary of stock and credit market moves. News from Capitol Hill will also be closely watched for signs of tension.

Please feel free to contact me (jeremy.cook@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

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