European Commission publishes ‘best seller’

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EURUSD continued its momentous descent breaking through the 1.24 support level without really breaking a sweat. The usual suspects were looming large, but Italian 10-year yields saw fit to join the 6%+ club. A poor bid-cover at yesterday’s auction and rising costs on Spanish debt saw yields soar for Italy.

Cable continued to follow suit reaching a new low of 1.5517 during the day and fell even further to 1.5465 during the Asian session. The continued influx into USD saw US 10-year Treasuries hit an all-time low of 1.673. With US GDP and jobless figures out today we could easily see USD continue to break barriers, however poor data may spur a much overdue, EUR revival.

Brussels released its economic report cards at midday and to put it bluntly most member states would be re-sitting exams. The Commission released a whopper 100,500 page report on the economic health (or ill-health) of the 27 member states. The main structural highlights for the UK included high private debt levels, a low-skilled labour force, a shortage of affordable housing and a widening trade balance, as high GBPEUR continues to weaken UK exports.

The bulk of the report was hard number crunching on country specific targets, revisions and progress to date. We can expect contraction in 2012 for Italy and Spain, modest growth for the UK and France with stalling growth for the Germans. The report, a far cry from the latest John Grisham page-turner, did offer some interesting sub-plots and a few punchy proposals.

Ollie Rehn, the EU monetary affairs chief, suggested granting Spain a 1 year extension on its debt reduction pact. Germany should raise wages to lift competitiveness across Europe and France needs to try harder and do more to meet its 3% deficit target. It made proposals for the formation of a Banking Union. This would allow European banks to share the burden of failing banks. This proposed banking union shares a striking resemblance to its associate, Eurobonds, albeit wearing a different frock and bonnet. The underlying principals are the same, this union will alleviate pressure on the troubled sovereigns at the expense of the Germans, who will of course be absorbing the brunt of the risk. We have seen it all proposed and dismissed before.

The EU said it was able to envisage the bailout fund directly recapitalising the struggling banks, as proposed earlier in the week by Spain. This will relax the burden on national government finances by adopting a more direct approach. If this plan was to ever gain any legs, EU legislation would have to be changed. No sooner had Mr. Rehn sat down following his speech had Germany, Austria and Finland already denounced the plans. More long term solutions to short term problems… brilliant.

Latest polls from Greece show that New Democracy and Syriza are both currently deadlocked at 24.5% apiece. This shift in balance has seen ND surrender its lead obtained in the last round of polling. With less than 3 weeks until the elections, things are heating up in Athens.

Poor retail sales figures released by Germany (-3.8 vs 0.2 expected) have already seen EUR fall this morning. Employment figures are also due for Germany. GDP and jobless claims for the USA due in at 12.30. The Irish Referendum today will see the Irish nation head to the polls to vote Yes or No to the new Fiscal Pact. Last reports showed the government backed the ‘Yes’ vote to win but perhaps the EC’s deficit target extension for Spain may have caused a last minute change in opinion.

The plot thickens…

Latest exchange rates at time of writing

Indicative Rates Sell Buy
GBPEUR 1.2496 1.2525
GBPUSD 1.5480 1.5500
EURUSD 1.2390 1.2415
GBPJPY 122.00 122.30
GBPAUD 1.5910 1.5932
GBPNZD 2.0490 2.0520
GBPCAD 1.5910 1.5940
NZDUSD 0.7540 0.7570
GBPZAR 13.1745 13.2220
USDZAR 8.2927 8.3365
GBPPLN 5.4732 5.5000
EURJPY 97.58 97.82

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