The currency blog

This morning brought a surge of Euro strength to the markets as traders and investors alike bought into the single currency. With Italy following Spain, Portugal and Greece with a statement on its austerity measures, the Eurozone PIGS finally understand the severity of the problem. Unfortunately, it could be too late for Greece with reports in the FT claiming that “public debt to gross domestic product forecast to hit 150%”, which makes it hard to believe the country will correct its problems before the aid runs out. This story clearly has a long way to run.
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Spain’s parliament are to vote on government’s plans to cut  €15 bln off the budget deficit today.  Expectations are that the government will see it’s proposals approved, but voting is expected to be tight.  Basque Nationalists said yesterday they will side with main opposition in opposing the cuts. Further along the med and Italy have planned to make €24.9 of budget cuts over the next two years are viewed by the Italian PM Berlusconi as “absolutely necessary” in order to support the Euro and protect Italy.
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Yesterday was packed full of announcements from the Eurozone, some welcome some not. First, Italy followed Greece, Spain and Portugal in outlining €20bln of government savings aimed at bringing their deficit below the EU threshold by 2012. Second, Spain announced the merger of four regional savings banks to one, in the process creating its fifth largest financial institution and, it is hoped, bringing much needed stability to the beleaguered Spanish banking system. The shotgun marriage comes hot on the heels of the Spanish Governments rescue of Caja Sur, another regional lender, after its own merger fell through at the final hurdle. The not so welcome news is that Germany is looking to extend the ban on short selling to all shares (this is extended from government bonds, credit default swaps and the top 10 German financial institutions). Quite how this unilateral ban will work when it looks as though we are entering a fully blown bear market in not clear, but we do expect continued volatility in the EUR/USD and GBP/EUR pair as investors try to gain from falling markets.
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The euro weakened for a second day against the US Dollar, the Japanese Yen and the British Pound as signs the European debt crisis is spreading revived concern the region’s recovery will slow. In particular, the 16 nation currency fell to within one yen of its weakest point in more than eight years after the IMF urged Spain to do more to overhaul its ailing banks. Markets are concerned about what policy makers can do to contain the debt crisis should it spread from Greece to bigger nations like Spain and Italy. The IMF welcomed the new Spanish austerity measures, referring to plans to rein in its budget deficit with the deepest cuts in three decades but expressed concern over its banking industry and the slow reaction in consolidating ailing lenders with stronger partners. The EUR/USD is now back trading close to the May 19th four year low.
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Today sees the start  of a new age of austerity as the Government announces £6 billion of immediate spending reductions, paving the way for much deeper cuts in the future. The Liberal-Conservative coalition is hoping that these initial cuts will prepare the population for severe fiscal measures next year with reports of up to 300,000 public sector redundancies. Despite these unpopular decisions, markets have been indicating that they want these measures in place if Sterling is to recover against the majors in the long term.
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Stock markets around the world suffered further falls yesterday as investors continued to unwind risky positions and move into calmer waters. The problems in the Eurozone have been the driving force behind the huge market movements we have seen across the currencies over the past few days. China has been powering the world’s economy over many years, but with Europe its largest customer, investors fear a European induced Chinese slowdown would derail any economic recovery. Hedge funds are reported to be reversing positions to preserve capital, most notably in the Aussie dollar pairs, which have seen large swings in value over the past few days.  Disappointing economic data yesterday from the USA showing a surprise increase of 25,000 in jobless claims and poor Eurozone consumer confidence figures exacerbated the negative sentiment in the market yesterday.
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