Euro under pressure as Italy downgraded and Greek bail out talks drag on.
20/Sep/2011 • Currency Updates•
The euro slid sharply, moving closer to a seven-month low after standard and Poor’s cut its debt rating on Italy and as sources said two Chinese state banks had stopped trading currency swaps with some European lenders. Ongoing concerns on whether Greece will be able to borrow cash from international lenders forced investors to sell riskier assets, with the growth-linked Australian dollar hitting six-week low and emerging economy currencies such as the Korean won dumped across the board. S&P’s rating cut on Italy has preceded any move by Moody’s, which had been expected to be the first major credit ratings agency to downgrade the country.
We also heard news that Greece may hold a voter referendum on euro zone membership as a way to strengthen the government’s hand in dealing with the debt crisis within the euro zone or by exiting the single currency. Prime Minister George Papandreou is considering calling for the referendum as pressure has mounted from all sides with Greece’s foreign creditors pushing for quicker budget cuts, while large-scale citizen street protests against austerity are held almost daily.
The British Pound slipped to a fresh monthly low yesterday and sterling may face additional headwinds over the week should the Bank of England show an increased willingness to expand monetary policy further. The BoE minutes may highlight a dour outlook for the U.K. in light of the slowing recovery, and an increasing number of the MPC may see scope to increase the asset purchase program beyond the GBP 200B target as policy makers see a growing risk of undershooting the 2% target for inflation. In turn, the GBP/USD may continue to give back the advance from earlier this year, and the exchange rate may threaten the rebound from last December as the U.K. faces an increased risk of a double-dip recession. However, should the BoE endorse a wait-and-see approach for the remainder of the year, we are likely to get a near-term correction in the British Pound as the GBP/USD remains oversold.
All eyes were on President Obama yesterday as he spoke about his new plan of how to cut U.S. budget deficits. His recommendations were in part to raise taxes on the rich however these were rejected by the Republicans who are strongly opposed to any tax hikes. The overall savings Obama is trying to create is to the value of $3.6 trillion over the next 10 years, however this is not regarded as enough to shift the stance of credit agencies such as Standard & Poor’s who as we know last month downgrade the U.S. government debt.
Markets this morning are thinking that the Federal Reserve speaking tomorrow are going to opt for the “Twist”, selling of shorter term paper to finance the acquisition of longer term bonds in order to hold down long term yields, with the aim of boosting private sector investment without increasing the balance sheet.