Weekly Cypriot £ rates and comments - 3rd September 2007

The markets became a bit calmer in the last few days as the news flow was less scary. But we shouldn't get complacent as I suspect there are still significant problems out there just waiting to see the light of day and when they do the markets will move very very quickly. Debt funding is going to be a problem for the medium term which is going to constrain growth. The Bank of England has not had to pump in the huge volumes of liquidity into the market place that the Fed had to in the US and the European Central Bank in Europe. This has enhanced the BOE's reputation but sterling is not looked at as a safe haven asset and as such will be under pressure when problems arise. The BOE meets this is week and is expected to keep interest rates on hold.

 

A bit of strength for sterling against the Cy.£ towards the end of the week and it has pushed up to Cy.£0.86/£1 inter bank but please remember this is the holiday season and volumes are low. The Cy.£ is pegged to the Euro and as such is greatly affected by the Euro. The German banks have suffered greatly from the problems with sub prime loans being significant buyers of the securitized sub prime debts that were distributed around the world and have proved to be near enough worthless. We have truly become a global market and this has increased the volatility resulting from the recent credit crunch. The European Central Bank is meeting this week. It had indicated at the press conference following the last meeting that it would raise € interest rates. However, this is now considered unlikely given the problems already noted. I would still consider buying on any short term weakness in the Cy.£, such as now, as it may be short lived.