Currency Watch: The week that was

There is a lot to get through from this week and so we might as well get George Osborne’s Autumn Statement out of the way first.

The fact is that the Autumn Statement had very little impact on the markets, with sterling and gilts actually rising on the day versus the US dollar and euro.

Europe remains the number one concern for the markets at the moment it seems and even though we saw growth rates cut for this year to 0.9% from 1.7% in March and for 2012 to 0.7% from the earlier forecast of 2.5%, the market remains happy.

One thing that George Osborne hung in his speech on Wednesday and, to a certain extent since he came into office, was that the UK would keep its credit rating at AAA.

A shot was fired across the UK’s bows by Fitch, however, with the ratings agency warning that while “policy response does demonstrate a continuing commitment to placing UK public finances on a sustainable path… the capacity of UK public finances to absorb adverse economic and financial shocks that would result in yet higher public debt while retaining its ‘AAA’ status has largely been exhausted”.

In layman’s terms it means that should we see a big bank topple over, or if the fallout from a European implosion reaches our shores, then we may see a ratings downgrade after all.

To be honest, I think this is less of a problem than most people do anyway. Our AAA rating is only still in place as a result of our central bank being independent, the same explanation can be given for why gilts are so highly sought-after at the moment.

As long as we have a central bank that has an unlimited backstop of cash to fall back upon, a slight change to our credit rating would not be the end of the world. Sterling was also little moved on the Fitch statement.

Wednesday was meant to be the quietest day of the week and turned into one that many people in the market will never forget.

Rumours had been circulating for a couple of weeks that a coordinated response from central banks to unjam funding markets was possible, and it came to pass this week.

The Federal Reserve, alongside five other central banks (Bank of England, ECB, Bank of Japan, Bank of Canada and Swiss National Bank), all announced a plan to allow banks to borrow dollars at lower rates than previously.

Cutting these swap costs is equivalent to interest rate cuts and the fact that these central banks are now basically providing unlimited US dollars to banks with which to fund themselves the central banks will be hoping this is a turning point in the crisis.

We do not know what caused this move, we may never know, but the smart money is on the fact that yields on one year German debt went negative yesterday morning (i.e. paying Germany to lend it money).

This may have been a signal that the money markets were a short shove away from complete collapse.

It also signals that the world’s central bankers have had enough of the political mud-slinging and intransigence, and they decided to take the situation by the scruff of the neck.

This isn’t a new plan of course and we have seen cuts to these swap rates in the past and they have not worked. Maybe this buys Europe a little time because it certainly doesn’t fix the long-term structural issues in the Eurozone.

In currency land we saw huge moves away from the US dollar with GBP and EUR gaining about 1% against the greenback and GBPEUR slipping back into the 1.16s. It’s certainly been quite a week.

Jeremy Cook is chief economist at World First foreign exchange