Sterling finds gains over euro after Spanish downgrade

Publication date: 13 June 2012
Author: Richard Driver, CaxtonFX

Tuesday’s session brought the news that 18 Spanish banks were downgraded by rating agency Fitch. Spanish government bonds touched 6.80% as a result, so sterling found some gains over the euro. Data out of the UK was poor but sterling weathered it very well, with the eurozone troubles a much higher priority.

Today’s session brings some eurozone industrial production data and some US retail sales data, though it will become increasingly difficult to distract the market from the Greek electoral uncertainty in the coming sessions.

STERLING/EURO: A blanket ratings cut of 18 Spanish banks gave the euro a negative tone on Tuesday.

• Although the downgrading of Spanish banks was largely anticipated, it certainly added some weight to the euro. The Spanish bank bailout would have been an effort to shore up confidence but with questions surrounding a break-up of the eurozone, foreign deposits will continue to be withdrawn from Spain, though we are not yet seeing a fully fledged bank run. Whilst Spanish growth remains so poor, capital flight will remain the trend, which should see the Spanish government follow its banks in asking for aid.

• Sterling’s weak manufacturing and industrial production data highlighted the UK economy’s current economic contraction, but this only temporarily weighed on this pair, which currently trades above €1.24.

STERLING/US DOLLAR: Sterling had a decent day but $1.56 is providing some solid resistance on the upside.

• Despite worrying Spanish bank downgrades, global equities actually performed remarkably well yesterday, which ensured a softer session for the US dollar. Today’s US retail sales data promises to be pretty poor, but the Fed’s monetary policy is out of the headlines at present so it shouldn’t hurt the dollar too much.

• Sterling is meeting some tough resistance at $1.56 and this level should hold firm today. The closer we get to the Greek elections, we are likely to see more demand for the safe-haven dollar.

EURO/US DOLLAR: The euro traded sideways around the $1.25 level on Tuesday, helped by some positive ECB comments.

• This pair consolidated yesterday after Monday’s sharp decline. The ECB Vice-President Constancio lent sentiment a helping hand by pledging that the central bank stands ready to act if the situation in the eurozone deteriorates. One would wonder how much conditions have to worsen before the ECB does act, because ECB President Draghi seems reluctant to act at present.

• The euro surprisingly shrugging off fresh euro-era highs in Spanish 10-year bonds, a measure of the degree to which the Spanish bank bailout has failed to allay market fears. This pair is trading above $1.25.

STERLING/AUSTRALIAN DOLLAR: The Reserve Bank of Australia chief warns against hoping for a weaker AUD.

• Reserve Bank of Australia Governor Stevens warned against wishing for a weaker aussie dollar exchange rate, but celebrated the increased purchasing power for Australian consumers as a consolation. Australia’s mining boom should keep the AUD relatively strong for while to come. Nonetheless, this does preclude sterling rebounding well above current levels, should conditions in the eurozone continue to weigh on risk appetite.

• Sterling is trading at 1.56 this morning and we may see another visit below this level today.

STERLING/NEW ZEALAND DOLLAR: Sterling is trading below the 2.00 benchmark this morning, with sentiment a little more positive in Asian markets overnight.

• This evening’s session brings the monthly Reserve Bank of New Zealand interest rate decision and press conference, which should shed some light on the central bank’s interest rate outlook. The RBNZ will almost certainly keep the current 2.50% interest rate on hold but it will be interesting to see just how concerned Governor Bollard is with the strength of the NZD at present.

• Sterling has dipped below the 2.00 level and we could well see the kiwi dollar maintain the front foot today.

STERLING/CANADIAN DOLLAR: Sterling edged higher against the Canadian dollar, though 1.60 is proving a tough nut to crack.

• The loonie failed to capitalise on a positive day for US stocks on Tuesday. Poor US retail sales data may weigh on the loonie to some degree today. The markets managed to shrug off fresh euro-era highs for Spanish 10-year bonds, but should pressures build and the 7.00% mark be hit, risk appetite could well take a major hit.

• Sterling made a few attempts to breach the 1.60 level yesterday but failed every time, we may see this pair edge back down now.