The Celebrations are over ... now comes the nightmare!

Week Commencing Monday 4th June 2012

Overriding Market Themes

With liquidity in the Forex markets distinctly lacking a certain British feel during the beginning of the week, rumours have been rife that the European Central Bank may be edging closer to cutting interest rates to a new historic low as the debt crisis tightens its grip in the Eurozone economy. While it is not expected for the officials to reduce the benchmark rate of interest in the Eurozone today, 32 out of 44 economists surveyed in a recent Bloomberg poll suggested that a drop of 25 basis points would be quite likely in the coming quarter. What will this mean for the beleaguered Euro currency? In general when a central bank reduces its benchmark rate it makes a currency lower yielding, sparking a decline in its value. However, will markets see the reduction as the bitter medicine that the zone needs to spur growth, sparking a bullish return in sentiment across the zone? I wish I had the answer, although be prepared for the ride.


The G7 is meeting once again, although not in the comfort of Camp David but via satellite to discuss the events unfolding in the Eurozone.  This comes amid fresh worries about the Eurozone’s economy, underlined in data showing that private sector activity, including in Germany, fell in May. This all comes as Spain fights to stay alive in credit markets, while Cristobal Montoro, Spain’s Finance Minister conceded that “the door to markets is not open to Spain”. The main issue in the zone is the split over which way to proceed forward, especially on whether to launch a common bond to help ease borrowing costs in peripheral nations. The so-called “Eurobond”, or “Eurobund” as many commentators are labelling it would help consolidate Eurozone debt and reduce the interest rate countries must pay to borrow. Germany however is seen as the prime candidate to underwrite such an undertaking, and has consistently stated that it believes that a fiscal union should precede the introduction of Euro-wide bonds.


In slightly better news, Australia’s economy expands more than expected in the first three months of the year, providing some good news that a global slowdown is not impacting some growth. The economy grew 1.3% during the period from the last three months, while analysts projected a 0.5% expansion. One of the biggest worries about the Australian economy has been that while it’s mining sector has been performing in recent years; other parts of the economy have not been doing so well. Continued expansion however rests on a resolution to the global economy crises and of course a resolution to the Eurozone issue, so while the Aussies can relax for a while, it doesn’t get them out of the storm entirely. 

GBP This Week

Owing to a shortened week thanks to the Diamond Jubilee celebrations, this is a rather dull week for UK data. We start the week however with Wednesday’s Construction PMI release, which we expect slightly worse than previous reported. This should come as no surprise as a decline in construction was the main component to UK GDP decline in the first 3 months of the year. Moving to Thursday, we have the Bank of England base rate decision and discussion over the UK’s asset purchasing program. We expect no change in either however we would not be surprised if we hear increased discussion on whether accelerating the QE program would help lift the UK out of recession. Services PMI and Halifax HPI are also due to be released on Thursday, although no massive change in projected. The week ends with the release of PPI Input for the month, which once again I do not expect to be too different from the previous release.

USD This Week

Three days of heavy US data is being led by Unemployment Claims on Thursday, which is expected to increase slightly over the month. Thursday is also set to be a big day as Bernanke testifies on the economic outlook and policy before the Joint Economic Committee in Washington. Trade Balance is the highlight of Friday, which we expect to decline as demand for the greenback wains in favour or other safe havens such a Japan and Switzerland. 

EUR This Week

As usual, a number of European bond auctions are taking place this week which should test the resolve of international investors. French and Spanish 10 year bonds are to be auctioned on Thursday, to which I would expect to see an increase in yields in both as the woes of the zone deepen. Wednesday sees the ECB Press Conference which sets with minimum bid rate, or benchmark interest rate, for the zone. Again, we do not expect any changes but will avidly listen to the rhetoric to hunt for greater resolve. 

In Other News

NU Currencies wishes to extend our heartiest congratulations to Her Majesty the Queen on her Diamond Jubilee. 60 years in a fantastic achievement and our thoughts go out to Prince Phillip, whom we wish a speedy recovery. The celebrations were absolutely fantastic and it is great to see, despite the best of British weather, so many people out of the streets celebrating. I feel somewhat sad at the thought of taking our bunting down in the office, as it isn’t very often us Brits feel good about ourselves, and part of me wishes the celebrations would continue. One thing I have taken away from this however, is that despite all that is wrong with this country, I am very proud to be British. 


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