Is Spain heading for an exit?

Is Spain heading for an exit?

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 26th of September.

As violent street protests erupt in Spain over budget spending cuts, questions are being raised if Prime Minister Mariano Rajoy will formally seek bailout at all? The ECB President Mario Draghi has set the stage for Spain to seek a formal bailout by committing to buy peripheral bonds in unlimited quantities once Madrid presses the bailout button. But investors, desperately wanting Spain to forward its request, have been left guessing. When is it going to happen? This Thursday? Next month? Nobody knows!

Whether the ECB’s so-called Outright Monetary Transaction will actually help the eurozone will remain open to speculation. The central bank’s move, some call its quantitative easing by another name, will however surely help other asset classes like bonds, gold and equity. But for Rajoy, it will mean political hara-kiri. Every national leader before him who sought bailout package has been dumped in next election, Ireland and Greece being the prime examples. With elections due in Rajoy’s home-turf Galicia next month, a wipe-out is the last thing the prime minister needs.

Secondly, secessionist tendencies have gathered steam in an already fractured country with Catalonia joining the chorus for independence. Some of the autonomous Spanish regions have possibly started to believe that they can escape austerity by breaking away from Madrid, putting pressure on the country’s unity.

Some in Madrid may think Spain can get away without formally seeking a bailout ever because the world knows the ECB stands ready to step in whenever requested. After all, you don’t wish to get caught on the wrong foot shorting Spain knowing the central bank may change the scenario overnight. Markets and Madrid are waiting for the other to blink first. However, if neither does, the results could be catastrophic. Some of the biggest lenders may collapse suddenly while bank deposits will evaporate due flight of capital. Bond yields may immediately spiral out of control and even an immediate ECB intervention may not undo the damage fully.


GBP/EURO – 1.2559
GBP/US$ – 1.6169
GBP/CHF – 1.5181
GBP/CAN$ – 1.5863
GBP/AUS$ – 1.5611
GBP/ZAR – 13.3007
GBP/JPY – 125.66
GBP/HKD – 12.5347
GBP/NZD – 1.9712
GBP/SEK – 10.6426

EUR: The single currency has weakened against the greenback over the past 24 hours to settle below the 1.2900 mark. Euro edged higher initially after the draft guidelines on European Stability Mechanism suggested the bailout fund will invest core assets in only AA- or higher rated sovereign and some other financial institution debts. The EUR/USD pair hit a high of 1.2670 only to give away gains after Phil-Fed President Charles Plosser said QE3 may not succeed in stimulating either the economy of the job market. Violent anti-austerity protests in Spain is currently weighing on the single currency as markets try to figure out if Madrid will agree to seek a bailout after agreeing to strict budget cuts. The GBP/EUR pair opens at 1.2565 this morning.

USD: Cable traded near flat against the greenback over the past 24 hours even though the greenback struggled earlier as risk sentiments improved following better than expected September US consumer confidence reading. The trend reversed later in the day and the dollar continues to strengthen as political unrest grips Europe, particularly Spain. Markets will stay focused on German bond auctions today while we have new homes sales figure in the US for August due later today. The GBP/USD pair opens at 1.6160 today morning.

Have a great day!


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