Royal Alliance Capital Currency Report

Euro buoyed by Greek bailout

After much posturing, last week saw euro zone leaders agree the terms of a second Greek bailout. The euro gained over two cents versus the pound and over three cents against the US dollar following the news.

In an effort to reduce Greece’s current debt burden from 160% to 120.5% of Gross Domestic Product (GDP) by 2020, Greece will receive an additional €130 billion, staving off the imminent threat of default. Private creditors will take a 53.5% loss on their holdings of Greek debt – more than the 50% agreed in October. The European Central Bank (ECB) will also hand back any profits made on its Greek bond holdings in return for further austerity measures.

Following news of the bailout, credit ratings agency Fitch downgraded Greece’s rating from CCC to C. C is the lowest rating above a default and is evidence that problems still remain for Greece and the euro zone. However, the euro remained largely unaffected and went on to make further gains following positive industrial orders data. Friday’s German GDP data offered no surprises, confirming the German economy shrank 0.2% in the final quarter of 2011.

Sterling’s languid performance continued with economic announcements offering mixed messages. Tuesday’s public sector net borrowing data showed the largest surplus (of revenue over spending) in the public finances

since January 2008. Pointing to a slowdown in spending, UK public borrowing stood at £93.5 billion for the financial year; significantly below the government’s forecast.

Thursday’s Bank of England meeting minutes revealed a 7-2 vote in favour of the £50 billion quantitative easing (QE) extension announced earlier this month. The two dissenting policymakers preferred a £75 billion move, surprising the market consensus and underpinning the pound’s declines. Friday’s UK GDP data failed to offer any major shocks, confirming the economy contracted by 0.2% in the final three months of 2011.

The US housing market continued to show improvement, helping the US dollar hit mid-week highs of $1.5653 versus the pound. The US housing price index, existing home sales and new home sales all showed gains in their respective releases. The Dallas Federal Reserve president Richard Fisher boosted sentiment towards the US dollar, describing the possibility of further QE as ‘wishful thinking’. However, the US dollar relinquished its gains later in the week as market sentiment improved and investors sought perceived riskier assets.

The Japanese yen fell to ¥129.76 against the pound, its lowest level since August 2011. Speculation the Bank of Japan was intervening to devalue its currency in an effort to boost its economy undermined the yen. The price of crude oil reached 8-month highs as increased political tensions saw Iran cut off oil supplies to Britain and France. This subsequently helped underpin support for the commodity-bloc currencies such as the New Zealand dollar and South African rand.

Minutes from the Reserve Bank of Australia’s (RBA) recent policy meeting helped boost the Australian dollar to intra-week highs of $1.4647 against sterling. After recent speculation the RBA might cut interest rates, notes from its recent policy meeting concluded there should be no pressing need to adjust interest rates over the coming months. A rise in South African consumer inflation helped the South African rand extend its recent gains against the pound.

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One Response to Royal Alliance Capital Currency Report

  1. Pingback: Royal Alliance Capital Currency Reprot « Royal Alliance Capital

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