Market frustrations with
Spain on the rise
Spanish PM Rajoy’s failure thus far to accept the
inevitable and make a formal request for a bailout has weighed on the euro in
recent sessions. The week ahead brings plenty of interest; we are due to see
Spain’s draft budget for 2013, the results of the Spanish banking sector’s
recent stress tests and an economic reform programme that is likely to be a
prelude to a bailout package. Even if these developments are welcomed by the
market, we still think that Rajoy will wait until after Spain’s regional
elections on October 21, which leaves several more weeks of uncertainty and
frustration. This should delay any further euro rallies.
On the Greek front, we have seen some alarming
headlines that the budget deficit is nearly twice as large as initially
estimated. Talks between Greece and the Troika are now on a one week hiatus, so
the market is left with alarming rumours of the need for a third Greek bailout
and another Greek debt restructuring. The option of granting Greece more time
to meet its bailout targets is gaining support but at this stage we are very
much in speculation territory.
Concerns over eurozone growth have returned to the
fore this week, after another awful German business climate survey. The risks
of a German recession are rising, a development which the periphery can
ill-afford.
Sterling firm ahead of final GDP number
The pound is performing well across the
board at present. Eurozone concerns have returned after an August lull, while
the central banks of Japan and the US have both eased monetary policy further,
leaving sterling to reap the rewards. In addition, UK data has improved in
recent weeks and the BoE seems to be content for the time being to delay any
further QE of its own.
Sterling should be able to hang on to
its recent gains against the euro and perhaps even build upon them, provided
that Thursday’s final UK GDP number for Q2 does not suffer a downward revision
to the already worrying -0.5% reading.
This release, which is likely to remain unrevised, is the only major event on
the domestic calendar this week. By and large, the market’s gaze will be firmly
fixed upon Spain.
US
dollar soft after QE3 decision but continues to look poised for a bounce
Sterling remains at heady heights close
to a 13-month high against the US dollar, thanks in no small part to the Fed’s
decision to do a third round of QE earlier this month. However, the dollar’s
behaviour since the decision suggests the move was more than a little bit
priced in. Certainly the pound has climbed against the greenback but it has
really stalled at the $1.63 level, so much so that we expect the rate to fall
back in the coming weeks (provided that Rajoy doesn’t surprise us with an early
bailout request)
End of week forecast
|
GBP /
EUR
|
1.2625
|
|
GBP /
USD
|
1.6150
|
|
EUR /
USD
|
1.2800
|
|
GBP /
AUD
|
1.5600
|
|
|
|
Risk appetite is pretty weak at present and the flow
of news out of the eurozone is predominantly very negative. There remain
disagreements over the EU banking union, over the legality of the ECB’s
bond-buying programme, over the cession of Catalonia from Spain and much more
besides. With this in mind, the GBP/USD rate’s ceiling of $1.63 looks likely to
hold firm in the coming sessions. Meanwhile against the euro, sterling looks
better placed to climb further. A move back up above €1.26 is a likely one this
week.
Richard Driver
Currency Analyst
Caxton FX
