Tag Archives: Spain

Stick or Twist

The Euro is slightly down this morning as remnants of the political scandal that emerged in Spain last month continue to linger. Allegations published in Spanish Newspaper El Pais last month, suggested that from 1997 onwards, Spanish Prime Minister Mariano Rajoy received regular payments of €25,000 that were hidden from tax authorities. Although these are, at present, only allegations, the mere suggestion of such conduct is enough to worry markets. Should these allegations be proved to be true then we could see sentiment towards Spanish assets turn considerably negative, which would inevitably hurt the Euro.

Additional uncertainty is also likely to grow within the Eurozone as we approach the Italian elections at the end of this month, especially should the gap close further between front runner Pier Luigi Bersani and Berlusconi’s PDL party. This uncertainty is likely to have contributed to the tapered advance of the Euro this week, as its unrelenting strengthening seems to have now been somewhat restricted. The Euro has dropped off against both Sterling and the Greenback this morning, with the Pound having risen by nearly half a cent so far today against the Euro, and the pair is currently trading at 1.1575. The Euro has similarly dropped off against the Dollar, falling to a daily low of 1.3513 this morning, before holding, and slightly recovering to its current level of 1.3530.

Markets are likely to be trading relatively flat this afternoon with little economic data due out and only UK House Price data having been released this morning, showing prices declined in January. However the main driver behind decreased volatility today is likely to be the fact that market participants are holding their current positions ahead of the ECB and BOE interest rate decisions due to be made tomorrow afternoon. Whilst both rates are expected to remain unchanged, should there be any adjustment, this could well provoke substantial movement in the Pound or the Euro.
In yesterday’s blog we recalled comments made by Luxembourg Prime Minister last month that the Euro was then already ‘dangerously high’. It would appear that such concerns are growing throughout the Euro Zone regarding the current strength of the Euro. French President Francois Hollande commented yesterday that “the Eurozone must, through its heads of state and government, decide on a medium-term exchange rate”. It is likely that Mario Draghi will face questions regarding this issue at the ECB press conference tomorrow and any suggestion of controls being placed on the Euro could weaken the currency considerably.

Mark Webster

Currency Update

Positive UK data released this morning fuelled a moderate rally in the Pound, albeit a very short lived one. UK Markit Services PMI showed a substantial rise to 51.5 in January and caused Cable to spike upwards immediately following the release before dropping back off to where it is now, trading flat for the day at 1.5750. Similarly GBP/EUR rose slightly following the UK PMI figures, however the pair has now weakened and Sterling’s decline has seemingly resumed, with the pair now trading at 1.1630.

The Euro has strengthened against both the Pound and the Dollar this morning following the release of PMI figures. Whilst UK PMI data showed a positive increase, Markit Services PMI results for Spain, Germany and the Euro Zone were also positive. However, this data was soon contradicted by EU Retail Sales figures which showed sales were down -3.4% in December. As market participants digest the figures, it would appear that they have not yet decided that Sterling is oversold or the Euro has appreciated too far. However, one must recall the comments made several weeks ago by Luxembourg Prime Minister Jean-Claude Juncker, who stated that the Euro is ‘dangerously high’ – if that observation was correct then, the Euro must now be in an extremely precarious situation.

Elsewhere this morning we saw the Reserve Bank of Australia commit to keeping interest rates at 3.0%. The Aussie Dollar dropped off against Sterling and the Greenback following the data release as RBA Governor Glenn Stevens gave an explicit indication that rates could well go lower in the future. Despite these comments, the outlook for the Australian economy would appear to be consistently improving as China’s rebounding growth continues to be confirmed. This morning the HSBC China Services PMI hit 54.0, up from 51.7 the previous month. GBPAUD currently trades at 1.5140.

EU Summit 18-19th October

EU leaders will meet today for a two-day summit over plans for a single supervision mechanism and banking union and the wider issues surrounding the Eurozone crisis. In the days leading up to the summit the Euro has appreciated in a climate of calmer European stock markets and lower borrowing costs for Greece and Spain. There has also been a significant effort from Germany to argue for greater European economic and fiscal integration. EURUSD currently trades at 1.31 and EURGBP is currently trading above 0.81p (1.23). GBPUSD has also tracked EURUSD higher and trades above 1.61 on the interbank market.

Despite the relative increase in positive sentiment surrounding the Euro, it must be remembered that the summit is being held against a very dark backdrop. Greece today is braced for its twentieth general strike in two years and Spanish premier Rajoy continues to drag his feet on Spain’s bailout request. Any bailout request is now anticipated in November after the Galician and Basque parliamentary elections held on October 21st. Whilst it should be noted Catalonian parliamentary elections are due to be held on November 25th. Full Catalonian independence is unlikely to happen soon, if at all, but any Catalan struggle for greater autonomy would damage confidence, at a time when Spain needs to reassure the bond markets and fellow EU members , that the central Spanish government has its problems in hand.

No formal announcements are expected on Greece or Spain but any leaked comments could cause volatility in the Euro.

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10:00 18.10.12

Bank of England Quarterly Inflation Report & Eurozone Bond Yields

Today’s Bank of England Quarterly Inflation Report has suggested that UK inflation has peaked and is likely to fall sharply from its current rate of 5% (down from 5.25% in the previous month September) to 1.3% over two years. The Bank has also cut its UK economic growth forecasts to 1% for 2011 & 2012 but indicated growth should climb towards 3.1% in two years.

Both the outlook to economic growth and inflation are seen as unusually uncertain and much will depend on developments in the Eurozone, the Eurozone debt crisis posing the single biggest risk to the UK economy.

Current forecasts suggest that UK interest rates are likely to remain low for a prolonged period of time with the first interest rate hike from the Bank of England not expected until at least 2013 whilst the prospect of further Quantitative Easing remains a strong possibility.

The debt crisis continues in Europe with Italian 10 year debt trading back above the unsustainable level of 7% and the yield of Spanish government bonds back above 6%. Besides the usual suspects, debt market yields of France, Austria, Netherlands and Belgium have also risen sharply, hitting Euro era highs. Moreover, the spread between French and German 10 year debt has also hit a fresh high.

Clearly the debt crisis poses a significant threat to the value of the Euro, the Euro has been surprisingly resilient so far but over the medium term I would expect the Euro to fall against the US Dollar and Sterling.

On the interbank market the Pound is currently trading between 1.57-1.58 against the US Dollar and between 1.16-1.17 against the Euro.

Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote.

BoE & ECB

The Bank of England and the European Central Bank have both left their monetary policies unchanged today at 0.50% and 1.50% respectively as growth slows and the European debt crisis spreads to Italy and Spain.

The Pound is up against the Euro trading between 1.14 – 1.15 and in the region of 1.63 against the US Dollar. The Euro currently trades at 1.42 against the US Dollar.

The Pound has also appreciated against commodity currencies, passing 1.54 against the Australian Dollar and 1.58 against the Canadian Dollar.

The exchange rates mentioned in the above email are based on the current interbank rate. Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote.

Currency News

Last week the currency markets were firmly focused on the Euro with the fiscal problems of Greece and also Spain and Portugal taking the headlines. Speculation built throughout the week that the other European Monetary Union states, led by Germany, would come to Greece’s aid. However, markets were clearly disappointed that whilst a rescue package was agreed in principle, European leaders failed to set out a comprehensive package.

The Euro was also pressured following the release of disappointing Eurozone GDP data. Total Eurozone 4th quarter 2009 GDP expanded by a mere 0.1%, the market had been expecting growth of 0.3%. Noticeably, German GDP (the largest European economy) failed to expand at all, whilst Italian GDP slipped back into contraction. Spain, hit by a housing market collapse and official unemployment greater than 20% remained in recession.

As a result, the single currency fell to a low of 1.3531 against the US Dollar, its lowest level since May 2009. The US Dollar, viewed as a safe haven, appreciated across the board as investors took flight from risk as stocks and gold prices tumbled. The Pound fell to 1.5534 against the US Dollar but rose past 1.15 against the Euro.

 In the UK the Bank of England released its Quarterly Inflation Report. The report was markedly pessimistic about the UK economy, revising its growth forecasts down. UK Interest rates are expected to stay low for a protracted period of time as growth remains weak and inflation is expected to fall back below the 2% target after initially spiking higher to 3%. Moreover, the Bank of England failed to rule out the possibility of extending its asset purchase scheme know as Quantitative Easing. Consequently, the Pound is expected to stay weak for some time. However, some gains could be made against the Euro, depending on how the Greek bailout develops. Sterling’s 25% depreciation should eventually help the UK economy grow as our exports become more competitive.

 Elsewhere, the Australian Dollar rallied following better than expected employment data with GBPAUD falling to 1.76. In China concerns over potential asset bubbles, led officials to order banks to increase their levels of reserves in a bid to cool the amount of lending.