Risk sentiment returns to the market as Spain request aid and Greece finalise Buyback deal

Tom Tong04/Dec/2012Currency Updates

GBP

Sterling hit a one-month high against the dollar on Monday. This was mainly caused by the recent developments in the eurozone, as well as positive data released from the UK. The Manufacturing PMI report for November was released yesterday and came in at 49.1. Not only was this reading higher than the previous figure of 47.3, it also topped the market’s forecast of 48.1.

However, George Osborne gives his “autumn statement” tomorrow, and it is unlikely to be optimistic after saying on Sunday that Britain would take longer to deal with its debt pile and that a recovery will be sluggish. There is also speculation that the Office for Budget Responsibility will lower its growth forecasts and could predict that the UK will miss its debt reduction. This would be bad news for the UK as it would endanger its triple A credit rating.

As for data for today, the UK construction PMI report is due at 9:30 am. Analysts expect it to come in at 50.7, but if the report prints better than expected; we could see the pound strengthen again.

EUR

The euro hit a six-week high after Spain formally requested aid for its banking sector and Greece announced the terms of its debt buyback deal, prompting a rally in Greek government debt. Greece’s plans to spend up to €10bn to buy its own debt at a steep discount, in its efforts to meet conditions set ahead of the payment of the next tranche of financial aid, swapping existing debt with six-month paper issued by the European Financial Stability Facility. The process allows Greece to gauge the level of demand for the bonds before it sets a final price for the deal. The buyback shall be conducted via Dutch auction.

The single currency rose more than 0.6 per cent against the dollar to a session high, its strongest level since October. This was due to risk sentiment returning to the markets, bolstered by manufacturing activity increasing in China in November for the first time since July, while figures showed that manufacturing across the eurozone fell for the 16th month in a row. However, this failed to have an impact on the single currency. Markit stated that the pace of decline had slowed. In particular, the manufacturing industry in Germany, the eurozone’s largest economy, contracted at a slower rate in November.

USD

The dollar started the week with a very poor performance as it lost ground to both the euro and sterling. This was mainly due to poor ISM manufacturing PMI figures. The November manufacturing figures slipped from 51.7 to 49.5 due to weak overseas demand and a decline in investment, offsetting signs of revived growth in China.

Political haggling in Washington over the “fiscal cliff” remained the primary focus of investors. Unless Congress acts, some $600 billion of sharp spending cuts and tax hikes will take effect starting in January, which could tip the U.S. economy into recession.

There are no major reports coming out of the U.S. today, but we could possibly also expect more of the same volatility, with the ISM non-manufacturing PMI data expected around 3pm. If these figures come out disappointing, there could be another dollar sell off.

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Written by Tom Tong

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