Italian resilience overcomes downgrade

andres del risco

Friday was a quiet day by all accounts, but that didn’t stop the FX markets from having a good old wobble in the early afternoon. After the excitement surrounding Chinese GDP in the early hours of Friday morning there was little else of real interest expected, data wise. Italian inflation came in as predicted and Japanese production beat expectations for May.

The highlight of the morning was the Italian bond auction. Moody’s downgraded Italy’s credit rating early Friday morning by two notches to Baa2 – just two above junk status. Needless to say the timing wasn’t the best, as the two morning auctions were vital for market confidence as well as for Italian finances. Italy sold EUR3.5bn of 3 year debt at 4.65% vs 5.3% last month and EUR5.25bn of 10 year at 5.82% vs 6.19. Equities rallied well and all the main European Indices never looked back, finishing the day in the green.

At the flick of a switch around midday we saw EUR plummet quickly by just under a point against USD and GBP. With no hard data or fundamental movements to point the figure the rumour mill started spinning. ECB deposit rates and recent negative yields from EZ cores were getting the blame. Since the ECB cut deposit rates to zero – capital has been rechanneled into safe debt (producing negative returns) and not being channelled into illiquid economies that need it more. Markets didn’t like that much and EUR suffered. Make of it what you will….

Having said that we saw an equally aggressive correction a few hours later as EUR rocketed. As is common on a Friday afternoon we saw mass EUR short covering as traders hedged for the weekend. The volumes were more potent than usual with EUR at such lows vs the USD and GBP.

Looking forward to today the big names on order of play will be EU inflation and US retail sales in the afternoon. With the US enjoying a nice run of form of late an improvement on May’s -0.2% will see USD strengthen further pushing EUR and GBP below the 1.22 and 1.55 supports respectively.

Indicative Rates Sell Buy
GBPEUR 1.2700 1.2728
GBPUSD 1.5537 1.5560
EURUSD 1.2215 1.2240
GBPJPY 122.70 123.00
GBPAUD 1.5190 1.5220
GBPNZD 1.9518 1.9545
GBPCAD 1.5757 1.5786
NZDUSD 0.7948 0.7974
GBPZAR 12.8120 12.8608
USDZAR 8.2350 8.2740
GBPPLN 5.3160 5.3430
EURJPY 96.50 97.06

Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered. Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.

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