Italian & Spanish debt yields reach unsustainable levels

Italian & Spanish debt yields reach unsustainable levels

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 19th of April.

Amid all the din over Spain going the Greece way, ratings agency Moody’s Analytics fired a fresh salvo, saying Italian and Spanish debt yields have already reached unsustainable levels. Till now a borrowing cost of 7 percent and above were considered unsustainable. However, Moody’s said Spain’s 5.76 percent and Italy’s 5.5 percent borrowing costs may prove too much because of crippling government spending cuts. Spain can managed a GDP ratio equivalent to 97 percent of its GDP, but with borrowing costs breaching the 5.7 percent mark, chances of default rises significantly.

The report however noted that it didn’t expect Italy or Spain to seek bailout funds from the IMF or the European Union. Italy has a €1.4 trillion debt pile and the report caps borrowing cost at 4.2 percent. If both the countries were to seek bailout money similar to Greece and Ireland, chances of the euro breaking up becomes more real with the region plunging in deep recession.

On the brighter side, the UK has more headroom to manage the economy than Berlin if borrowing costs were to climb significantly. It won’t be before 2013-14 that the EU would full recover from the present economic contraction, the report observed.

 

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2220
GBP/US$ – 1.6039
GBP/CHF – 1.4697
GBP/CAN$ – 1.5893
GBP/AUS$ – 1.5481
GBP/ZAR – 12.5490
GBP/JPY – 130.73
GBP/HKD – 12.4422
GBP/NZD – 1.9638
GBP/SEK –  10.7986

EUR: The single currency weakened against the Sterling on Wednesday and the GBP/EUR pair hit 1.2233 in the day’s trade as the BoE minutes revealed capping of assets purchase program. MPC member David Miles was the only exception to have favoured further quantitative easing this time around. The cable got further support from a better unemployment reading in March as unemployment rate dropped to 8.3 percent from 8.4 percent previously. The single currency also took a beating as the IMF warned of massive deleveraging requirement of the region’s banks. Investors were reluctant to bid the euro up ahead of Thursday’s Spanish and German debt auction. Latest data suggests demand for Spanish debt was well supported and the single currency is expected to consolidate against its global peers today. The GBP/EUR pair opens at 1.2222 this morning.

USD: The cable started off strongly against the greenback yesterday as UK unemployment reading came in better than expected. Also a 8-1 voting against further QE by the BoE MPC forced investors to pare back further assets-purchase expectations in May. The GBP/USD pair hit a high of 1.6042 in the day’s trading and continued to move higher overnight, touching a high of 1.6077. The pair is expected to remain strong today ahead of the US existing home sales and the Philadelphia Fed survey reports. The GBP/USD pair opens at 1.6057 today morning.

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