The French poet Jean de la Fontaine once said “A person often meets his destiny on the road he took to avoid it”. The road that the Eurozone finds itself on at the moment is one that it has tried to avoid for the best part of 2 years and in the coming days both the destiny of the Eurozone and the politicians in power will be determined. We have seen politicians move closer to an agreement on how to recapitalise banks and it seems some form of accord on losses on Greek government debt may be close as well. That however leaves the big question as to how the European Financial Stability Facility is going to be expanded so as to deal with the liabilities from not just Greece but with Italy, Spain, Portugal and whoever may get themselves into trouble further down the line.
A draft that was released to the market yesterday showed that leaders will be unable to pin a number on how much the EFSF will need to be expanded by until “they meet with investors”. If they are unable to solidify a number today then it is unlikley that it would take place until the next tme that leaders are all in a room together again which would be November 7th. The political pressures are starting to tell as well; the FT was leading yesteday afternoon with an article stating that the Italian government was likely to fall as the coalition splits apart over fiscal reforms to appease the EU while Dutch politicians are looking for an agreement today that puts the Eurozone crisis to bed and little apart. It is going to be a long day. You can follow all the developments, in real time,
With all the kerfuffle on the other side of the channel it would be easy to overlook Mervyn King’s testimony to the Treasury Select Committee yesterday morning. The governor seemed to be in a pretty foul mood and seemed loathe to answer the questions from the assembled members but answer them he did and the main things to take away are key to sterling’s future path. The Governor was certain that the plan to reignite the asset purchase plan was correct and that it will have a broadly similar effect to that of the first plan i.e. that it provided stimulation to the economy of the equivalent of a 150 to 300bps cut in interest rates. The impact to inflation was only expected to be that of about 50bps and that the high inflation at the moment is a direct result of commodity price moves and tax level increases. The governor also seemed sure that the eventual ending of the plan would not cause too many problems as instances of similar movements in the level of money in the economy had been dealt with successfully before.
Sterling was relatively unchanged on the announcements with currency traders preferring to fight on other fronts in yesterday’s session. USDJPY hit a new post WW2 low yesterday as fears that the Europeans will not be able to get their act together took hold and caused a flood into the haven yen. This has reawoken conversations about possible intervention in the yen by the Bank of Japan and whether they will rejoin the Bank of England and the Federal Reserve in the business of printing more money. We expect some form of intervention by the Bank of Japan soon; the export market is being hammered by the strong yen and it may be the case that they decide to set a floor such as the Swiss National Bank did against the euro recently to help the Swiss Franc.
Risk seems to have rallied a tad in the overnight Asian session despite the fears from Europe and the poor consumer confidence number from the Unites States that showed that the US consumer is in all kinds of trouble with most of the blame apportioned at continued falls in the housing market.
Apart from the European summit, of which we are unlikely to have any real results until around 8pm UK time, the focus will fall on Italian business confidence at 9am, UK CBI trends and US new home prices at 3pm.
Indicative Rates Sell Buy
GBPEUR 1.1492 1.1519
GBPUSD 1.6008 1.6032
EURUSD 1.3921 1.3945
GBPJPY 121.58 121.85
GBPAUD 1.5408 1.5435
GBPNZD 2.0074 2.0102
GBPCAD 1.6200 1.6229
NZDUSD 0.7966 0.7988
GBPZAR 12.67 12.72
USDZAR 7.9037 7.9431
GBPPLN 5.0000 5.0510
EURJPY 105.74 105.99
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