After seeing wild swings in currency markets this week, trade appears to have calmed somewhat. The European Banking Authority is expected to release the results of stress tests conducted on 90 European banks with the results not expected until the close of business. The International Monetary Fund has already issued a warning that capitalisation needs to continue for European banks to meet the standards of their US counterparts. The second focus is on the US budget negotiations. While the two sides appear closer to a deal now then they have in the past, there is still a large gap in the negotiations that needs to be closed.

Sterling

The pound continues to hover near two week highs, while sterling holds near one month highs against the euro. Trade in sterling will continue to be influenced by external factors as there is no local data to influence sterling trade.

US dollar

Both Moody’s and S&P ratings agencies have now warned that the triple AAA sovereign debt rating for US Treasury bonds will be downgraded if a deal is not reached over fiscal reform. China, the biggest foreign creditor with $1 trillion worth of debt on their books, told Washington to adopt responsible policies to protect investor interest. The thought of China unloading their holdings is overwhelming. A sell off in Treasury bonds would put interest rates higher and lead to a certain collapse of the economy, while the stability of financial markets goes down the drain.

Japanese yen

The Japanese Finance Minister continued to offer warnings over the strength of the yen. The yen continues to show “one-sided” moves. A spike in the yen prompted speculation over whether the Financial Minister had intervened in currency markets to stem the tide of yen gains.

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