GBP: Strong retail sales
UK retail sales surprised to the upside, gaining 1.2% on the month vs. expectations of a 0.5% decline. The result pushes the annualized rate to 3.3%. The numbers are welcome for the UK economy but fundamentals are not driving currencies at present. The announcement of the acquisition of a distressed lending by a stronger firm has helped stabilize sentiment in the UK's capital markets, and central bank action to alleviate stress in funding market is also helping risk assets across the board. Like other currencies, we expect volatility to remain dominant, especially considering the exposure of the UK economy to the fortunes of the financial services industry. Key on equities related vol rather than yield and yield spreads.

The DJIA traded up a large 410 points overnight and was not all that convincing until the market got wind of a Treasury Sectretary Paulson plan to create a fund that would mop up toxic debt, and a Paulson and Fed Charirman Bernanke meeting with congressional leaders on Thursday night. Market expects the plan to be similar to that of the RTC, the Resolution Trust Corp, which was used to clean up bad debts from the savings and loan crisis in the late 1980s at a $400bio cost to taxpayers.
Elsewhere, UK's FSA has banned investors from taking new short positions against those who bet on price declines. GBP rose on the back of British Bank Lloyds TSB deal to buy troubled HBOS together with a jump in retail sales of 1.2% vs an expected decline of 0.5%

The verbal attempt to threaten action against "illegal" short sellers is a weak and media driven issue. There are far too many issues to overcome to discourage legal short selling. To scare off the illegal short sellers would only represent an inconsequential change, thus immaterial impact on market forces.

Today: Sept 19

Risk appetite has soared across the board as markets rallied on hopes that policymakers and lawmakers in the US will be able to adopt a comprehensive long-term plan to tackle the current crisis. Treasury Secretary Paulson, Fed Chairman Bernanke met with key congressional leaders yesterday for a briefing on the matter and reports suggest that the Treasury and Fed would establish a fund to buy bad debts off the financial system, modelled on the Resolution Finance Corporation from the savings and loans crisis in the late 1980s / early 1990s. Wall Street responded buoyantly to the news during trading yesterday, with the three major indices gaining the most in six years and major European indices are expected to open sharply higher. EURUSD has unwound its risk-aversion gains, trading in a range of 1.4167-1.4349, and USDJPY is also much higher in a range of 105.40 - 107.01. New of a long-term rescue plan capped a day of almost unprecedented policy initiatives to contain the fallout from the credit crisis, ranging from restrictions on short-selling and massive liquidity injections by central banks to alleviate severe tension in money markets. Although markets are rallying, central banks in Asia were forced to step in again today to stabilise markets and funding pressures are likely to remain. On the FX front, the key to determining whether a policy development strengthens or weakens the dollar is whether the policy response is monetary or fiscal in nature. Lending operations conducted by the Fed are generally dollar-negative as it increases the perception that the US problems could eventually be partially monetized and outstanding debts would gradually be inflated away. Operations conducted by the Treasury with the backing of Congress are more explicitly fiscal in nature and are dollar-positive as it induces inflows by foreign bond investors. However, central banks which are overweight dollar reserves may be forced to reassess strategies in the wake of recent developments, especially if the resolution of the crisis would involve a heavy fiscal burden. On the fundamental side, jobless claims increased to 455k but markets are displaying relative indifference to data at present. Congress is likely to move with speed to come up with a rescue plan but many short-term issues, especially with regard to the future of impaired institutions require urgent attention, making all currencies prone to rapid swings in risk appetite. There are no key data out today; Chicago Fed President Evans will speak later today at 17:00 GMT.

The ultimate question remains on how long will the collective intervention last before more natural forces push further declines. I don't think we've seen the last of financial disclosures from the financial sector.

Ref: UBS

Tags: Intervention