By Peter Lavelle
Welcome to the Pure FX account of the latest changes in the foreign exchange rates.
This is intended as a brief guide to movements in the exchange rates overnight, to put you in the best position for when you exchange currencies.
Spanish Budget Hits The US Dollar
The pain in Spain comes back again! The US dollar has fallen against the pound and euro overnight, as Spain unveils a tough 2013 budget intended to convince the markets it can meet its deficit goals, thereby boosting foreign exchange risk appetite.
Included among the 2013 budget, intended to make sure Spain hits its deficit target of 4.5% next year, is a 58.0% cut in public spending, leaving just pensions and debt interest payments intact. Of course, this is sure to mean more pain for Spaniards on the street, yet it shows that the Spanish government means business.
Indeed, commenting on the budget, Oli Rehn, European Commissioner for Economic and Monetary Affairs, said that it’s “well focused and in certain areas it goes even beyond what the European Commission recommended.” Hence, this toughness impressed the markets, boosting risk sentiment, and so putting the buck on the back foot of the pound and euro.
Eurozone Discord Could Send Euro Down
However, I should tell you that these euro gains look fragile. This is because, of course, a budget is just a statement of intent, and there’s no guarantee the Madrid government will meet its tough targets. In addition, there are other things that look set to hold the euro back.
For instance, overnight the Eurozone northern members (like German and Finland) announced that the ESM rescue fund cannot be used to bailout existing banks. Instead, it will only be used in future emergencies. Of course, the entire point of the fund was to break the link between indebted banks and governments, threatening a systemic collapse, so why exactly German et al. have decided this is a mystery.
In any case, Spain in particular needed that cash to fix its banking sector, pointing to continued challenges for the Iberian nation, and potential euro weakness. As Ayako Sera at Sumitomo Mitsui Trust Bank notes: “we still hear disharmony between the euro’s “northern league” and the south.”
UK Pound Climbs as GDP Revised Upward
A further reason the UK pound jumped against the greenback overnight was an upward revision in UK growth data. Great Britannia contracted just –0.4% between April and June according to the latest figures, up from an initial estimate of –0.7% two months ago.
Now, considering we had the Jubilee bank holiday in that time, which is meant to have knocked off –0.5% growth, that suggests the UK would have expanded slightly in Q2 if not for the holiday. That of course bodes very well for Q3 then, and a prompt rise out of double recession, which would also boost the pound.
Coming Up
Spain looks set to dominate the agenda again today, as the results of its independent bank stress tests see release. This will tell us just how much of the recent €100bn bailout (not connected to the ESM rescue fund) Spain will actually need to claim, giving a further lift to euro sentiment if it’s less than predicted.
In Canada meanwhile, Gross Domestic Product figures for July are unveiled, which could see the loonie rise or fall too.
Find Out More
I do hope you’ve enjoyed reading this post. To find out more:
Read our Daily Market Commentary to find out what’s affecting the rates today.
Take a look at our Foreign Currency Exchange Advice articles.
Look through our Top Tips to maximise your foreign currency transfer.
I will of course return with my next foreign exchange update next Monday. In the meantime, have a great weekend,
Peter Lavelle
28 September 2012
Tough Spanish Budget Lifts Mood on Foreign Exchange Market
By Peter Lavelle
Welcome to the Pure FX account of the latest changes in the foreign exchange rates.
This is intended as a brief guide to movements in the exchange rates overnight, to put you in the best position for when you exchange currencies.
Spanish Budget Hits The US Dollar
The pain in Spain comes back again! The US dollar has fallen against the pound and euro overnight, as Spain unveils a tough 2013 budget intended to convince the markets it can meet its deficit goals, thereby boosting foreign exchange risk appetite.
Included among the 2013 budget, intended to make sure Spain hits its deficit target of 4.5% next year, is a 58.0% cut in public spending, leaving just pensions and debt interest payments intact. Of course, this is sure to mean more pain for Spaniards on the street, yet it shows that the Spanish government means business.
Indeed, commenting on the budget, Oli Rehn, European Commissioner for Economic and Monetary Affairs, said that it’s “well focused and in certain areas it goes even beyond what the European Commission recommended.” Hence, this toughness impressed the markets, boosting risk sentiment, and so putting the buck on the back foot of the pound and euro.
Eurozone Discord Could Send Euro Down
However, I should tell you that these euro gains look fragile. This is because, of course, a budget is just a statement of intent, and there’s no guarantee the Madrid government will meet its tough targets. In addition, there are other things that look set to hold the euro back.
For instance, overnight the Eurozone northern members (like German and Finland) announced that the ESM rescue fund cannot be used to bailout existing banks. Instead, it will only be used in future emergencies. Of course, the entire point of the fund was to break the link between indebted banks and governments, threatening a systemic collapse, so why exactly German et al. have decided this is a mystery.
In any case, Spain in particular needed that cash to fix its banking sector, pointing to continued challenges for the Iberian nation, and potential euro weakness. As Ayako Sera at Sumitomo Mitsui Trust Bank notes: “we still hear disharmony between the euro’s “northern league” and the south.”
UK Pound Climbs as GDP Revised Upward
A further reason the UK pound jumped against the greenback overnight was an upward revision in UK growth data. Great Britannia contracted just –0.4% between April and June according to the latest figures, up from an initial estimate of –0.7% two months ago.
Now, considering we had the Jubilee bank holiday in that time, which is meant to have knocked off –0.5% growth, that suggests the UK would have expanded slightly in Q2 if not for the holiday. That of course bodes very well for Q3 then, and a prompt rise out of double recession, which would also boost the pound.
Coming Up
Spain looks set to dominate the agenda again today, as the results of its independent bank stress tests see release. This will tell us just how much of the recent €100bn bailout (not connected to the ESM rescue fund) Spain will actually need to claim, giving a further lift to euro sentiment if it’s less than predicted.
In Canada meanwhile, Gross Domestic Product figures for July are unveiled, which could see the loonie rise or fall too.
Find Out More
I do hope you’ve enjoyed reading this post. To find out more:
Read our Daily Market Commentary to find out what’s affecting the rates today.
Take a look at our Foreign Currency Exchange Advice articles.
Look through our Top Tips to maximise your foreign currency transfer.
I will of course return with my next foreign exchange update next Monday. In the meantime, have a great weekend,
Peter Lavelle