The euro continues to make gains against both the pound and US dollar after yesterday’s European Central Bank (ECB) press conference saw ECB President Jean-Claude Trichet announce that the ECB would be continuing its accommodative monetary policy and extend its special 3 month liquidity measures over the first quarter of 2011 to help alleviate short term cash flow problems.
There were also reports that the ECB was buying more sovereign bonds which caused the yield on Portuguese, Spanish, Belgium and Italian bonds to drop, easing the borrowing costs of these heavily indebted countries. This helped calm nervous markets. But Trichet did not, as rumored, announce a mass purchase of government bonds.
Earlier on Thursday, the ECB had kept euro zone interest rates at 1% for the 19th month in succession, a decision that had been widely expected.
The markets also took heart from a successful Spanish bond auction with the Spanish government raising 2.47 billion euros from the sale of three year bonds following a successful Portuguese bond auction on Wednesday.
Credit ratings agency Standard & Poor’s warned Greece that it faces a further downgrade following proposals for a new bail out regime in Europe. S&P will make a decision within three months, enough time to gain clarity on the impact of the European Stability Mechanism (ESM). S&P voiced similar concerns about Portugal earlier this week as speculation grew that the country will be forced to accept a rescue package similar to the Irish.
The recent positive data has helped sentiment turn positive and driven stock and commodity markets higher. Oil prices reached a 2 year high in trading yesterday. The new risk appetite sentiment has diminished the attraction of the US dollar’s safe haven status. Today sees the publication of the key unemployment data from the US and a furthet drop in unemployment is forecast by many analysts.
In a sign that the rise in risk appetite amidst a more positive sentiment may not last until 2011, reports from China suggest it will tighten its monetary policy next year according to the Communist Party’s top body in a sign that interest rate rises may be on the way. The country has recently tightened lending rules by telling banks to keep more cash in reserve. Now the Communist Party’s Politburo has said China will shift its monetary policy from “relatively loose” to “prudent” according to the Xinhua news agency said.
Annualized consumer price inflation hit a 25 month high in October at 4.4%. That is well above the government’s full year target of 3%.
The IMF reported that China and Hong Kong would need to implement more measures to rein in property bubbles forming in parts of their markets.
For now, the recent rise in risk appetite has helped the euro to recover against the pound and US dollar and has also seen the high yielding and commodity currencies like the Australian, New Zealand and Canadian dollar’s and South African Rand make across the board gains.
