The political merry-go-round in Greece keeps turning with talks of a deal between the PASOK, New Democracy and the Democratic Left parties being bandied around this morning. All would want to renegotiate the terms of the most recent bailout and so, even if a government was formed, significant obstacles are still around.
It is China, however, that has grabbed headlines overnight with its April industrial production figures slowed to 9.3% (est 12.2%) and retail sales only grew by 14.1% (est 15.1%). Combine that with an easing inflation picture and the disastrous trade balance numbers released earlier in the week and the old fears that China is due some form of hard landing – where growth slows dramatically – are freshly stoked. Whether we see authorities in China loosen monetary policy in response to these figures remains a good question.
Asian equities dipped on the news with banking shares particularly hard hit following JP Morgan’s admission of $2bn of trading losses in Q2. The shares fell 6% in post-market trading as it became clear that systems and controls designed to keep this sort of thing from happening had not worked at all.
Positive jobs numbers from the US and the news that something may be afoot in Greece saw some encouragement return to the market. Sterling in particular got close to 1.25 versus the euro yesterday following the Bank of England’s decision to hold off on further asset purchases.
Inflation has remained uncomfortably high in the UK through the past couple of months and the hawks on the MPC will have balanced that higher inflation with the disappointing growth outlook in the UK. It is therefore likely that the persistently sticky inflation picture in the UK will see the Bank revise its CPI estimates higher at its next Quarterly Inflation Report.
We suspect that the minutes, released in a fortnight, will show a readiness to act should the situation deteriorate further (in the UK or Europe) and further communications from the Bank and the MPC members to emphasise the fragility of the UK recovery. We personally believe that the data from the UK will make this a fairly obvious state of affairs as well. For now the MPC is ready to battle the devil they know as opposed to the devil they don’t.
In all the hubbub surrounding Greece it is very easy to forget about other nations within the Eurozone and what impact recent events may have in the coming days. Spain launched a bailout of Bankia 48hrs ago in a bid to prevent it from going under and this now begins the 4th attempt by the Spanish authorities to clean up the industry since the property crash of 08/09. Deficit targets will be missed by the Rajoy administration in both 2012 and 2013 and it looks like the European Commission will ask for additional measures to cut spending in the regional government sector. Pressure on Spanish bond continues however with the 10yr still trading over 6%.
Francois Hollande also takes power in France this weekend and so we now must start thinking about his impact on the anti-austerity movement. Once Greece settles down, this will be the main political story for sure.
Indicative Rates Sell Buy
GBPEUR 1.2454 1.2482
GBPUSD 1.6096 1.6121
EURUSD 1.2908 1.2919
GBPJPY 128.43 128.71
GBPAUD 1.6060 1.6078
GBPNZD 2.0586 2.0615
GBPCAD 1.6167 1.6196
NZDUSD 0.7806 0.7828
GBPZAR 13.01 13.06
USDZAR 8.0819 8.1167
GBPPLN 5.2739 5.3004
EURJPY 103.01 103.25
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