Italy may just get out of the woods next year

Italy may just get out of the woods next year

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 12th of September.

Italy is making progress on its debt crisis. Ever since ECB president Mario Draghi announced his plan to buy unlimited bonds form the secondary market, 10-year yields have slipped by more than one percent. It is expected to fall further after the German Court’s favourable judgment on the ESM. With confidence returning, the need for a full-blown bailout is fading.

A bailout should be avoided if possible since witnessing Europe’s third largest economy on life-support doesn’t inspire confidence. Rome would require a primary surplus of 3 percent of GDP, which the IMF hopes the country would achieve this year, and a nominal 2.4 percent GDP growth to sustain the current debt levels.

The difficult part however is to convince investors that Rome can get its way out of debt, estimated to hit 125 percent of GDP this year, with current anaemic growth rate. Nonetheless, it will still have to travel quite some distance before the economy becomes competitive again. Investors are worried Italian PM Mario Monti’s reforms agenda may not survive next year’s elections while labour unions have already threatened to oppose changes. More clarity on privatisation also remains on investors’ agenda.

While Italian politics remains mired in uncertainties in the absence of majority by a single party, a grand coalition may emerge post elections, though it’s not a forgone conclusion. It’s widely expected that Mario Monti will continue in a senior position of the broader coalition. With 10-year borrowing costs close to pre-crisis level, Italians must not spoil the party now.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2488
GBP/US$ – 1.6068
GBP/CHF – 1.5104
GBP/CAN$ – 1.5648
GBP/AUS$ – 1.5362
GBP/ZAR – 13.1181
GBP/JPY – 125.27
GBP/HKD – 12.4772
GBP/NZD – 1.9614
GBP/SEK – 10.6124

EUR: The single currency gained further traction against the greenback yesterday over hopes the German Constitutional Court will rule in favour of the European Stability Mechanism and the proposed Fiscal Compact without much conditions. Markets are also keeping an eye on Dutch polls today to fathom the “euro-friendliness” of the newly elected government. The dollar’s continued weakness against the euro ensured the cable losing ground against the single-currency on Tuesday and the GBP/EUR pair dropped to around 1.2500. The single-currency has seen good support over the past 24 hours on news that Spanish PM Mariano Rajoy may seek ECB help. However, the euro is unlikely to rise further today as possible positive outcomes have already been priced in yesterday’s price action. The GBP/EUR pair opens at 1.2506 this morning.

USD: The greenback slipped across the board yesterday as investors positioned themselves ahead of Thursday’s FOMC decision. Prospects of further quantitative easing by the Fed brightened after rating’s agency warned to downgrade US’ credit rating if the country failed to bring down its debt-to-GDP ratio in next year’s budget negotiations. Sterling rallied to a fresh high of 1.6083 against the USD after UK trade balance data came in higher than expected and investors grew hopeful that the German court will pass favourable judgment on the European bailout fund. GBP/USD consolidated its position overnight, breaking to a fresh high of 1.6094 over news the Spanish PM is considering asking for ECB help. The GBP/USD continues to trade higher as risk remains well supported. The GBP/USD pair opens at 1.6085 this morning.

Have a great day!

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