Kathleen Brooks, research director at Forex.com gives her views on the latest events and news affecting currency markets.

Markets lack conviction before Bernanke

The big story of the past few days has been gold. After falling a stunning $100 yesterday, it fell to as low as $1,710 today before recovering above $1,730 by mid-afternoon in the London session. Gold has also fallen against all of the major currencies, and priced in euro it is currently down nearly 7 per cent. However, the sentiment in the stocks market has soured since the New York open, and stocks are being led lower in Europe by Germany.

Buffet becomes world’s investor of last resort

News that Berkshire Hathaway, the company owned by legendary investor Warrant Buffet, would invest $5 billion in the beleaguered Bank of America has pushed gold even lower. Part of the reason for gold’s surge in recent weeks has been down to stresses in the banking sector. In the US, Bank of America has seen its share price fall 40 per cent in the past month after announcing the largest quarterly loss in its history of $8.8 billion in the second quarter, which was fuelled by bad debts.

Buffet is gaining a reputation as the de-facto  investor of last resort/ savior of American corporate might after investing in other banks and General Motors when they were on their knees in recent years. He said his decision was a vote of confidence in Bank of America but also in the US, which he believes will not fall off a cliff saying it the current environment will not be a repeat of 2008. This has taken some pressure off Bank of America and its share price has risen more than 10 per cent on the news.

In contrast, pressures remain for European banks. The European Central Bank’s short-term lending to banks continues to rise suggesting that there is some reluctance for banks to lend to each other.  However, banking shares seemed to have made a bottom for now and are also rising on the Buffet news.

The Bank of America news is adding to the downward pressure on gold and other safe havens that tend to rise during periods of financial stress.  Expectations that Ben Bernanke will hint at more quantitative easing at his Jackson Hole speech tomorrow continue to be scaled back, which is also weighing on the gold price. He is likely to say that further support will depend on the economic outlook and it is too early to say if more stimulus is needed.

Greek problems back in focus

European stocks have been mixed as we lead up to Jackson Hole. Pressures still remain in Europe. Greek bond yields have hit fresh record highs. The ten-year bond spread with Germany rose to a fresh record, and one year bonds are yielding more than 50 per cent. Greece’s next tranche of bailout funds come due next month; however member states are still trying to arrange collateral agreements from the Greeks before they provide more financial support, which threatens to delay the release of the funds and cause another panic about a Greek default. The European Central Bank is reportedly buying more Spanish and Italian bonds to ensure yields remain stable.

Ahead today, Spain’s market regulator will make an announcement regarding temporary short-selling restrictions at 1700 BST. This will be closely watched by the markets. Rumors are also swirling that Germany may lose its triple A status, which is weighing on the Dax index.

The economic data has broadly been shrugged off by the market as investors lose conviction as we head towards the Bernanke speech. US jobless claims for last week were released earlier and they were higher than expected, rising to 417,000 from 408,000 last week, however the increase may have been overstated due to a continued strike by Verizon workers.

Elsewhere, in Switzerland the ZEW index fell to its lowest level since the end of 2008. This has followed Europe lower. In the UK consumer confidence continued to fall last month, but it was better than expected. Monetary Policy Committee member Martin Weale, who had voted for rate hikes before changing tack earlier this month, sounded fairly dovish in a speech today.  He said that the need for a rate hike had receded and inflation pressure should fall with the drop in the oil price. Added to that he was very bearish on sterling, saying that the pound needs to be lower to help the economy re-balance towards exports.

GBP/USD is fairly stable today, while EUR/GBP is above 0.8800 as the pound falters against the single currency. The dollar index is hitting resistance above 74.00 and is currently trading around 73.90. If it weakens from here we may see commodities and gold start to recoup some of their recent losses.

Kathleen Brooks is research director at Forex.com

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