The currency blog

Last night, the final leaders’ debate last focused on the economy with messers Cameron, Clegg and Brown answering questions ranging from the deficit to unemployment to benefits. However, given that in theory at least, the subject material divided the parties much more than the previous exchanges and therefore one may expect more of a ‘debate’, the overall spectacle was extremely poor. Mr. Cameron was judged by snap polls to be the winner, but petty squabbles and an inability to answer questions properly on important issue and dodge committing to actual figures were the main themes the leaders brought to the debating plinth. Read the rest of this entry »

Europe’s fiscal crisis worsened yesterday as news broke of Standards and Poor’s downgrade of Spain’s sovereign credit rating to AA. This action has fuelled fears of contagion spreading through the Eurozone economies with a Politician from Germanys Green party letting slip that Greece’s revised bailout package could be worth €140bn over 3 years. Analysts are warning of a financial crisis to the extent of the panic caused by the collapse of Lehman Brothers in 2008. Comments from German chancellor Angela Merkel stating it was a “mistake” for Greece to be allowed into the single currency helping to fuel the discord. Reports yesterday stated banks and pension funds sold euros at the fastest pace since the second half of 2008, when the currency plummeted 25 per cent over 3 months. With S&P taking the umbrella away as soon as it starts to rain, investors and politicians will surely be curious as to who will follow Greece, Portugal and Spain with a downgrade.

The yield on Portuguese 10-years bonds is the highest since 1997 while the spread on Spanish debt is the most in a year. The premium on Greek bonds, which were downgraded to a junk rating, fell yesterday to 9.97 per cent after talk of a more generous bailout eased pressure. The euro has suffered an 11 percent decline in the past 6 months making it the worst performer among its 16 most-traded peers. It hit a near 12 month low against the dollar dropping below 1.32.

Sterling fell against the dollar after former Bank of England policy maker Timothy Besley stated the UK economy remained in a “fragile state” and inflation is likely to stay under control this year. These comments have calmed fears that rising inflation would force the BoE’s hand into raising interest rates, action that would severely damage the recovery of the UK. Today, rumours have been circulating the City stating the UK’s prized AAA credit rating, which has been under close scrutiny, was saved from downgrade to AA. Allegedly, only the fact that the UK has less foreign debt prevented action from S&P. The final debate before the election takes place tonight with the main topic being the economy.

Stateside, the FOMC left interest rates at historic lows of 0.25 per cent. Sentiment remained positive as the recycled upbeat speech from Bernanke stating rates would remain low because of low inflation and elevated unemployment was read out.

ECB President Jean Claude Trichet will be speaking at 12:30, most likely sitting on the fence and contributing little to the current climate. Jobless figures for the US hit the market at 13:30 with a forecast of 440k.

Report by Tim Lewis

S&P downgraded both Greek and Portuguese debt yesterday, as fears over a fiscal crisis in the Eurozone continued to spread. As the market turns it attention away from the Hellenic Republic towards Portugal, two year Greek bonds are now yielding over 13% as investors offload them and worries over how the downgrade will affect ECB collateral requirements (which were only changed a few weeks back to try to stop this happening) take hold. The Euro fell to an 11 month low against the Dollar, the historical safe haven currency, and further falls seem likely and would be very welcome in dealing with the deepening sovereign problems throughout the Eurozone. Some commentators are speculating that the ECB could use its ‘nuclear option’ to help debt stricken countries fund themselves. This involves direct purchases by the Central Bank of Government bonds and is akin to printing money, which would put major downside pressure on the Euro.
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Greek bonds rose yesterday to a 12 year high as Germany and the IMF demanded a clear plan to how the country will reduce its overall deficit.

This plan would involve severe public spending cuts, tax hikes and the sale of state owned assets and will do nothing to improve the industrial unrest between the Greek government and its work force with further riots and strikes expected.
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After stabilising on Friday, the Euro took another pounding on Monday morning as details begin to emerge about the proposed €45 billion rescue package. Greece’s request for emergency aid looked to stem the flow of selling as Finance minister Papaconstantinou warned investors they will “lose their shirts” if they bet the cash strapped nation will default. The debt-saddled country has announced billions of euros in austerity measures, including tax hikes and public sector wage cuts. The Euro has been trading back above 1.16 against Sterling while Euro/dollar has fallen below 1.33. Read the rest of this entry »

The shifting sands of the British election were on the move again last night as the second leaders debate produced a narrowing in the polls between the thee main parties. Across the five post debate polls, the Tories and Lib Dems now stand on 33 per cent with Labour trailing behind on 29 per cent. After Nick Cleggs clear victory last week, both David Cameron and Gordon Brown lifted their game considerably and both seemed much more at home debating the important foreign policy issues of Afganistan and Trident. The problem for Sterling remains that if the polls were repeated at the General Election, a hung parliament will be the outcome.
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