Weekend provides no relief for euro

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Well I hope you had a restful weekend because this week is likely to be a volatile one. G20 finance ministers pledged to “a strong and coordinated international response to address the renewed challenges facing the global economy, notably heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth and unacceptably high unemployment”. They also said that “the euro area will have implemented by the time of our next meeting the necessary actions to increase the flexibility of the EFSF and to maximize its impact in order to address contagion”
While this is still only rhetoric it is a lot stronger than previous communications from the powers that be and allowed a slight risk-on air to take over the beginning of the Asian session. This has not lasted however and the euro has slipped back into the 1.15s against the pound and the 1.33s against the dollar.

The debate in Washington was ably summed up by two of the European members; Jean-Claude Trichet and Wolfgang Schauble. Trichet remarked that “Democratically elected governments are unable to take tough decisions unless they are under extreme pressure” while Schauble went with “The main reason for the lack of demand is the lack of confidence; the main reason for the lack of confidence is the deficits and public debts which are seen as unsustainable.”

As I pointed out when interviewed by ITV on Friday on this matter, the problem is the “credibility gap” that these supranational bodies have at the moment. It has been all talk in the past and no action, that simply will not do this time and the market will consistently remind them of that. Anyone who knows me will know of my complete disdain for the European political class and the way that they have conducted themselves throughout this crisis; lackadaisical would be a kind way of putting it. Gordon Brown was always accused of not repairing the roof when the sun was shining, I’m not sure the Europeans even thought to build the house.

The ECB has been quick to stress that banks in the Eurozone can take advantage of unlimited funding via a restarted 1yr liquidity operation and Noyer of the Banque de France said over the weekend that the French banks could withstand a 100% write down on Greek debt holdings and that “it would be absorbed in less than one quarter of profits.” That’s a good thing as we are likely to see a Greek default by Christmas.

Politics will dominate the European calendar this week with various governments voting on the ratification of the European Financial Stability Fund. Finland, who have the propensity to kick off when it comes to bailouts, vote on Wednesday morning and then hand it over to Germany’s Bundestag on Thursday. Obviously there is a fair bit of event risk surrounding that. German data is also a key this week with today’s IFO business climate survey (09.00) expected to show a further deterioration in German sentiment.

The UK data calendar is quiet but don’t let that let you think that the pound will be subdued…

Indicative Rates Sell Buy
GBPEUR 1.1496 1.1522
GBPUSD 1.5440 1.5462
EURUSD 1.3413 1.3437
GBPJPY 117.66 117.94
GBPAUD 1.5947 1.5974
GBPNZD 2.0077 2.0110
GBPCAD 1.5986 1.5980
NZDUSD 0.7670 0.7695
GBPZAR 12.71 12.76
USDZAR 8.2217 8.2777
GBPPLN 5.0743 5.1113
EURJPY 102.27 102.55

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