Is Spain planning to quit the euro?

Is Spain planning to quit the euro?

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 15th of October.

It’s been weeks that the markets are speculating about an imminent Spanish bailout. But don’t be surprised if Prime Minister Mariano Rajoy decides to opt out instead! Sounds unlikely? Well look more closely and you’ll know why.

In last year’s election, Rajoy had promised to not seek a bailout out. We all know that politician’s promises are meant to be broken. But investors should note that Rajoy can make good of that pledge right now and in-fact save his skin. He assumed power last December promising to avoid Portugal, Ireland and Greece’s fate. There’s a slim chance Madrid will get with lower borrowing costs with the threat of an ECB intervention looming on the horizon. Ten-year yields have fallen below six percent because traders don’t want to be caught on the wrong side if the central bank intervenes. However, delay that indefinitely and yields may soar.

Also there’s a possibility Spanish banks will clear their books of the bad loans and start lending again while inside the single-currency union. But both the options look unlikely and restoring the peseta a far more attractive choice.

Madrid’s GDP is now shrinking like Greece. It had a 20 percent overall unemployment rate even before the euro crisis began. However, unlike the Greece, the Spaniards enjoy a strong economy with a high export to GDP ratio. AT 27 percent, they equal both the France and the UK. Also Spain sells goods across the world with a focus on the fast-growing Latin American markets and has been in the currency union for political reasons.

It’s not very clear if the EU imposed austerity measures do any good to the countries. Take the case of Portugal, the country is slipping into deeper recession and the government backed down on tax hikes to meet deficit targets in the face of stiff opposition. Rajoy is unlikely to risk his political future for programs whose benefits are yet to be established. Worst still, the country may break up due to the troika imposed austerity. Spain has a competitive economy with lots of successful companies.

It far more safe for the Prime Minister to go back to peseta, bring the country’s own central bank to back the stricken lenders, devalue own currency and bring back competitiveness to contend with French and German rivals.

It could be a far less-painful transition for the Iberian nation. A Spanish walkout is a real possibility.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2405
GBP/US$ – 1.6024
GBP/CHF – 1.5002
GBP/CAN$ – 1.5708
GBP/AUS$ – 1.5672
GBP/ZAR – 14.0321
GBP/JPY – 125.92
GBP/HKD – 12.4271
GBP/NZD – 1.9678
GBP/SEK – 10.7412

EUR: The single-currency continued to trade range-bound on Friday with an upward bias against the greenback over speculations that Madrid is likely to request bailout this week. We have the European Council summit in Brussels on Thursday ahead of Spanish regional elections next week. The German ZEW economic sentiment survey reading is due tomorrow while the eurozone current account number and inflation readings will be released later in the week. Markets will stay focused on Thursday’s summit and developments over Greece and Spain will be closely monitored which also means extra attention for Spanish 10-year bond auctions on Thursday.

USD: The greenback remained nearly flat despite US consumer confidence reading hitting a five-year high to touch pre-crisis levels. We have the US retail sales number coming out in the afternoon while a raft of economic data releases including inflation, housing and manufacturing will be due throughout the week. The cable traded in a range-bound against the US dollar due to lack of any major economic news on Friday. We have a fairly hectic week ahead with Public Net Borrowings, inflation and jobless claims for September coming in. Minutes of the latest Monetary Policy Committee meeting are also due for release and all the nine members are expected to have voted to keep interest rates and assets purchase on hold.

Have a great day!

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