Spain’s GDP to shrink by 1.7% but it’s not all bad

Spain’s GDP to shrink by 1.7% but it’s not all bad

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 11th of April.

The European debt crisis is back in its full glory after Spanish bond yields breached the six percent mark this morning. Fears over Madrid facing a Greece type situation triggered a sell off on Tuesday, driving stock markets down by 3 percent. Spanish industrial output dropped by 5.1 percent in Feb, the biggest fall in three months and bigger than the five percent forecast by economists.

EU membership mandates a budget deficit below three percent; Spain missed the revised target of six percent by a wide margin and posted an uncomfortably high 8.5 percent. Madrid expects to raise an additional €27 billion through new taxes and spending cuts to meet this year’s deficit target of 5.3 percent. Prime Minister Mariano Rajoy announced an additional €10 billion of cuts to health and education over the weekend.

Spain however, is likely to plunge into deeper recession by cutting its spending indiscriminately. The country’s GDP is forecast to shrink by 1.7 percent this year and is likely to be revised upwards. The government’s debt as a percentage of GDP stands at a comfortable 67 percent, much lower than the UK, France and Germany. Keynesian theorists would argue this leaves enough room for government spending through borrowing and devalue its debt through monetary stimuli (QE) and inflation, similar to Britain. Unfortunately Spain doesn’t have a sovereign currency that places it at a considerable disadvantage. Austerity alone won’t work as it didn’t for Athens. If Spain can’t devalue its currency and spend, it may be forced to default on some of its obligations and may finally decide to quit the eurozone.


GBP/EURO – 1.2124
GBP/US$ – 1.5901
GBP/CHF – 1.4574
GBP/CAN$ – 1.5938
GBP/AUS$ – 1.5448
GBP/ZAR – 12.682
GBP/JPY – 128.72
GBP/HKD – 12.35
GBP/NZD – 1.9434
GBP/SEK – 10.791

EUR: As Spanish and Italian 10-year government bond yields inched towards the six percent mark yesterday, Italian equities plunged five percent with banking stocks taking the maximum hit. The euro however, showed resilience in the face of strong headwinds and the EUR/USD pair traded in the 1.3050-1.3150 range. The single currency held its ground against the cable and remained range-bound, trading in the 1.2080-1.2143 band. There’s not much economic news expected from the UK or the eurozone today and the market will closely watch the Italian T-bill auction this morning. The GBP/EUR pair opens at 1.2126 this morning.

USD: The greenback gained against most of its global peers except the Japanese yen as risks remained off the table yesterday. With no strong economic news from the UK, the pound weakened against the dollar and the GBP/USD pair touched an intraday low of 1.5809 from an opening high of 1.5900. The cable however, received some boost overnight after retail numbers released by the BRC showed sales were higher in March. There’s no data release due today in the UK. The GBP/USD pair opens at 1.5892 this morning.

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Have a great day!


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