Euro Drops for the First Time in 6 Trading Days, Further Drops Limited

GBP: Quiet Trading in Sterling
CAD: Will the BoC Drop Plan to Raise Rates?
AUD: Early Release of Midyear Economic Outlook
NZD: Gold Unchanged, Oil Down 1.5%
USD/JPY on a Tear

The British pound ended the day unchanged against the U.S. dollar and slightly lower against the euro. No U.K. economic reports were released this morning and the only piece of data due over the next 24 hours is the British Bankers Association’s loans for house purchases. For the most part, low interest rates have supported gradual improvements in the housing market and the BBA data should confirm that. This is a quiet week in terms of U.K. data but Thursday’s GDP report is important because it will determine whether the U.K. economy rises from recession. For the time being, we expect the weakness in the British pound to be limited across the major currencies because there is a good chance that given recent improvements in economic data, the Bank of England will hold monetary policy steady for the rest of the year.

In the absence of key economic data, the highlight of the day will be Governor King’s speech to the South Wales Chamber of Commerce this evening. In recent comments, he suggested that there were limits to what monetary policy could achieve when dealing with financial crises and conceded that sometimes it was right to “aim off the inflation target”. This suggests that King is likely to advocate for further QE at the next MPC meeting on the 8th November and we look for further clues to support this in today’s speech. Although, in the run up to the meeting the flow of data will likely shape the minds of some of the other members of the Committee that still remain undecided

First round of Spanish elections has concluded with mixed to modestly positive results for Prime Minister Rajoy as his Popular Party won in its stronghold of Galicia but lost badly to separatists in the Basque region. In Galicia the PP won 41 out of the 75 seats up from 38 the period prior while in the Basque region the Basque Nationalist party won 27 seats in the 75-seat Basque parliament, followed by the separatist Euskal Herria Bildu coalition with 21 seats, meaning around two-thirds of the assembly will be made up of nationalists.

Still the wins by separatists were not unexpected and the victory in Galicia was seen as a boost to Rajoy’s fortunes as it was perceived as essentially a referendum on his policies of austerity designed to help navigate Spain out of its sovereign debt crisis. As, the Spanish daily El Pais put it, ” With this victory, the Prime Minister recover the strength to manage a possible imminent rescue and to move forward with measures that are targeted as having to do with pensions and with further cuts.” In short, the strong showing in Galicia indicates that Rajoy may now have the political capital to make a formal appeal for a bailout which would be viewed positively by the market.

Indeed the euro rallied in opening Asian trade on optimism over the Spanish elections rising to a high of 1.3065 despite weak performance by equities. The pair has since come off the highs but remains well bid as credit tensions continue to ease. Mr. Rajoy’s greatest asset may be the fact that since the introduction of the OMT program by the ECB ( which has yet to go into effect) Spanish interest rates have fallen markedly from a panic high above 7% to around 5.25% currently helping to ease the tensions in the country’s credit markets.

Mr. Rajoy faces yet one final test on November 25th when the economically powerful Catalonia holds its regional elections. Catalonia has been a political cauldron with calls for separatism running high. The Catalan government has not only called for a snap election but also for a non-binding referendum on the issue of secession. Secession is considered to be illegal the Spanish national government and it has warned that it will not allow such a vote to take place. Therefore the Catalan elections are being viewed as litmus test of the general population on their genuine political desire for sovereignty. The strength of the win by the ruling GUI party which has taken on a secessionist mantle is being viewed as key barometer of Spanish national unity.

For now the market has clearly breathed a sigh of relief that Spain remains relatively unified and that Mr. Rajoy can proceed with plans for stabilizing the country’s economy but concerns persist and any strong outpouring of secessionist desire in November 25 elections could once again revive the threat of fracture in the region.

While the sell-off in stocks show that equity traders remained nervous about the earnings season and the outlook for the financial markets, currency traders are not convinced that tougher times lie ahead. High beta currencies such as the Euro, British pound and New Zealand dollars did not slide alongside stocks and USD/JPY powered higher. At the same time, FX traders are not blindly optimistic because the Canadian and Australian dollars weakened against the greenback. Investors are still nervous with only 2.5 more weeks to go before the U.S. elections and Chinese leadership change. Of course, Europe’s debt crisis is also a continuing headache for the market. With no major U.S. economic data released today and nothing material expected over the next 24 hours, the most exciting event will be the third and final U.S. Presidential Debate. While the debate will be focused exclusively on foreign policy, the dramatic contrast in tones of the first and second debate will make this one a session not to be missed.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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