Currency Joy for Rajoy

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Spain’s Partido Popular won an absolute majority in yesterday’s general election to move the ruling socialists out of power, the last of the centre-left governments in the EU’s larger countries. While new Prime Minister Mariano Rajoy will not be sworn into his office for another couple of week’s it is not like he will any semblance of honeymoon period when it comes to the country’s finances. In his acceptance speak he used the old political cliché of “Tonight we can celebrate, but tomorrow we have to work”, never has it been truer than in Spain’s case. The election will not stop the short-term volatility in the European bond markets however and we still expect the ECB to remain active to attempt to cut down yields over the coming weeks.

According to the Dow Jones newswire European officials are looking at opening talks with the IMF about how the ECB could lend to the IMF so that more money and more support could be given to those sovereigns that need assistance without the ECB breaking European law. The talks could result in an announcement at the EU Summit on Dec. 9, then again they could not. Just to ram home the German opposition stance to the ECB running its printing presses, Chair Weidmann of the Bundesbank, said that just because of a lack of success in dealing with the EZ debt crisis does “not justify overstretching the mandate of the central bank and making it responsible for solving the crisis”. A no-go then.

In other European news, Mario Monti won the confidence vote against him comfortably in the Italian lower house. He will have to bring productivity back to Italy quickly though as we, alongside most forecasters, believe that Italy is already in recession. Industrial production collapsed by 8.3% in September which was the largest fall since August 2009 with sales of industrial goods slipping by 5.4% in the same month.

A lot more focus will be on the US this week, probably the most since August’s debt ceiling negotiations. Out of those dis) agreements came a resolution that a cross-party super committee would meet and decide on a $1.2trn debt reduction package. It is expected that that same committee will come out this afternoon and say that they are unlikely to come to an agreement by the deadline date (this Wednesday). Failure to agree on these measures would trigger automatic government spending cuts due to start in January of 2013 and would impact significantly on things such as social security and Medicare. Failure to agree also means that another congressional ding-dong battle over raising the debt ceiling next year will have to take place. We expect most movements in cable and EURUSD over the next week to be put down “fears over the super-committee’s decision”.

News from the UK was few and far between and sterling has started the week roughly where it ended ahead of a fairly quiet week. Today’s data calendar is also quiet with only US existing home sales due at 15.00.France also goes into the debt markets with a EUR7bn bond issuance.

Indicative Rates Sell Buy
GBPEUR 1.1673 1.1700
GBPUSD 1.5779 1.5804
EURUSD 1.3501 1.3523
GBPJPY 121.12 121.41
GBPAUD 1.5787 1.5811
GBPNZD 2.0802 2.0832
GBPCAD 1.6233 1.6263
NZDUSD 0.7575 0.7594
GBPZAR 12.93 12.98
USDZAR 8.1922 8.2270
GBPPLN 5.1618 5.1918
EURJPY 103.65 103.91

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