Currencies DirectNovember 2012 Newsletter

Written by: Alistair Cotton
Currencies Direct

The past month has been a good one for the Euro. Ever since the ECB announced in July it would buy sovereign bonds in unlimited quantities, yields on Spanish and Italian government debt has been falling, lowing the cost of funding for both countries. September and October saw by far the steepest decline in yields, and more importantly below the psychological six per cent level and move allowed the Euro to finally mirror the move in the bond market, climbing against the Pound by three per cent as positive sentiment returned, albeit cautiously, to the single currency.

But Spain has not officially requested a bail-out, and so the ECB is yet to act. The markets are buying bonds ahead of the ECB in anticipation of making a quick profit as ECB demand, when it arrives, pushes up prices of Spanish bonds further. It is a good bet, it is inevitable that Spain will need ECB help sooner rather than later. It is also likely that the bail-out would lead to further Euro strength once formally announced as market participants who stayed on the sidelines, finally dip their toe back in water of Euro zone Periphery debt, adding to the potential return as the currency appreciates.

European politicians now need to create the systems and institutions that will make the Euro sustainable in the long-run. Putting them in place takes time, and the ECB has bought lots of it. The break-up premium that was attached to most financial assets priced in Euros is slowly diminishing. Despite continuing German protests, the move by the ECB was the only one available that protected sovereigns and bought time available to EU leaders in the timescale needed.

On a shorter timescale we have plenty of important data out over next month to look forward to. First up is the ECB and Bank of England monthly meeting. Neither are expected to move interest rates but the BoE may announce further asset purchases to keep the UK economic recovery on track. US unemployment data is also due out this week, and we also have the US presidential election on the 6th November. Also of concern is the potential damage caused by a large storm currently due to hit the eastern seaboard on Monday. US markets have been closed for the first time since September 1th 2001 and the uncertainty this may create will be negative for the Euro as the US Dollar strengthens.

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