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The risk rally that was born as a result of the central bankintervention in to the dollar-funding markets continued yesterday with the euro managing to strengthen once again versus the US dollar and the pound. Equities remained at the levels they had accelerated to, however, further gains were hard to come by. So now the central banks have bought the European politicians some time by unjamming the interbank lending markets and allowing them to focus on the deep-set issues that the European Union is experiencinced

Yesterday we saw Nicolas Sarkozy make an impassioned speech to a crowd in Toulon about the dangers that the French economy faces. The contents of the speech were relatively simple: tighter fiscal discipline and a national
oversight of budgets with penalties for countries that exceed them. Unfortunately for Monsieur Sarkozy, this was the only speech he could give and has pretty much guaranteed that he will lose next year’s French general

In Germany we also have Angela Merkel addressing the Bundestato set out proposals for a fiscal union i.e. centralised tax and spending policy and not merely centralised interest rate policy. The thing is that she is also very likely to give risky assets a kicking by once again emphasising that the ECB will not become the “Lender of Last Resort” and quantitative easing is not likely.

This stands apart from hints from Mario Draghi, ECB president, however. Yesterday in a speech to the European government he said that while strong rules on public finances will become the most important part of bringing credibility and stability back to the Eurozone, “other elements might follow, but the sequencing matters”. This has widely been interpreted as the ECB ramping up its bond programme of purchasing peripheral debt. One report I’ve seen believes that this may include the purchase of the debt from ALL Eurozone countries; another plan to institute quantitative easing by the back door.

On the subject of bonds, European bond yields fell yesterday on strong auctions from France and Spain. Although yields were higher than previous auctions they were lower than the market price at the time and strong demand was seen as well. Most of the demand will have come from banks who will wish to use that debt as collateral with the ECB against short term loans but this is good news all the same. What wasn’t good news was the broad slip in manufacturing PMIs seen in Europe and the UK yesterday. Both the UK and Euro-wide measures were below 50.0, showing that the manufacturing sectors are contracting and growth is now non-existent. The important services numbers are due on Monday.

Today is Non-Farm Payrolls day in the US and therefore we expect trade to be quiet in anticipation of the figure at 13.30. This is caveated by news from the Bundestag; - Angela Merkel always has the ability to throw things out of kilter.

Indicative Rates Sell Buy
GBPEUR 1.1640 1.1668
GBPUSD 1.5687 1.5712
EURUSD 1.3459 1.3482
GBPJPY 122.00 122.27
GBPAUD 1.5302 1.5328
GBPNZD 2.0084 2.0114
GBPCAD 1.5883 1.5910
NZDUSD 0.7801 0.7822
GBPZAR 12.65 12.70
USDZAR 8.0610 8.0931
GBPPLN 5.2007 5.2295
EURJPY 104.70 105.01

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