Turbulent times in Eurozone

Tom Tong01/Nov/2011Currency Updates

USD

With all the problems in the Eurozone, the dollar has been trading relatively steady against sterling, but making gains against Euro on the back of the Greek referendum and the Yen after the Japanese government made the anticipated intervention on Sunday evening.

U.S. stocks fell yesterday after shares in MF Global were suspended as they filed for Chapter 11 bankruptcy, making them the 8th largest bank to fail in US history.

Today is a fairly quiet day in the US for data as we see just ISM Prices Paid and Manufacturing figures as well as construction spending. Tomorrow is much more significant however with the US interest rate decision and Ben Bernanke’s speech giving us an indication into future monetary policy.

GBP

Sterling rose to its highest in two months against the yen on Monday and was on track for its biggest daily gain in more than seven months after Japanese authorities intervened to drive the yen lower. The dollar’s gains post-intervention left sterling under pressure against the greenback, but it rose more than 1 percent to a three-week high against a broadly weaker euro.

Many believe Sterling is being driven by external factors — investor perception about the dollar and the euro and the intervention by the Japanese has pushed the dollar higher, keeping cable under pressure.

Economists have said Britain’s economic recovery will continue to falter in the current quarter after it struggled to build momentum in the previous three months.. Any third quarter growth will not change a picture of an economy teetering on the brink of recession as crucial growth drivers such as manufacturing are stalling. However, the manufacturing Purchasing Managers’ Index (PMI) for October may shed more light on the state of the economy. We await the GDP figure out today which could have huge consequences for Sterling.

EUR

As one eye is focused on Greek debt another is focused on the Italian economy as the government’s ability to continue financing itself seems only to be a short term solution and appears the overall cost of Rome’s borrowing is reaching its tipping point. It appears that the cracks are now even beginning to show even more as French President Nicolas Sarkozy publicly announcing that allowing Greece to enter the Eurozone in 2001 was a mistake.

The long term outlook for the Eurozone also looks bleak as China released a statement that the government cannot see any future bonds being bought in Europe and will categorically not be coming to the euro’s rescue. Meanwhile, a 10-year cost of borrowing in bond markets has also risen and is only slightly short of the level when Italy joined the euro which has placed further pressure on the ECB to take them off the heat before the country will eventually boil over.

With the ever increasing discussion and views that the global economy is on the verge of a deeper and darker recession the emergency of the ‘three-pronged’ deal to resolve the Eurozone debt crisis, has even more significant importance to be cemented sooner rather than later. The three key areas for concern are Greek debt, the bailout fund and bank recapitalisation, which are seen as the key areas of current weakness due to an overall loss of confidence in the European economy. The view is that unless decisive action isn’t taken and a second recession does hit, it will at least take five years to overcome the side effects and loss in employment and return to pre-crisis levels.

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Written by Tom Tong

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