Spanish Economy Falls By 0.4 percent

Spanish Economy Falls By 0.4 percent

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

While yesterday’s German and French GDP numbers provided much-needed relief to the markets, Portugal and Spanish reading did just the opposite. Portuguese economy shrunk 1.2 percent in Q2 while Spain fell 0.4 percent. Make no mistake, but tiny country may very well blow up the Euro in 2012.

Greece is already bust and its eventual exit has already been priced in by the market. Portugal is exactly in the same situation, just on a longer fuse. Lisbon is also sliding towards a default, and when it does, the shock may be too much to bear for the European banking system.

It has been common knowledge that Portugal is in trouble. In May 2011, Lisbon was forced to seek a EUR 79 billion rescue package after borrowing costs breached the seven percent mark. The IMF and the European Union acted swiftly with the prescription that it had perfected over time for Greece, spending cuts, tax hikes and some structural reforms. Portugal, with a par capita income of $21,000 was directed to bring its deficit down to three percent in 2013 from the current 4.5 percent.

That was then. While Athens will see its economy shrink by six percent this year, a Citigroup report forecasts 5.7 percent contraction for Portugal in 2012 and another 3 percent in 2013.
Rising taxes however, have increased the size of the shadow economy and according to a Porto University study, the underground economy has grown to about a quarter of the GDP in 2011. Portuguese firms won’t be able to survive under the current high tax regime, hence any improvement in the tax base is unlikely to happen soon.

The results are obvious. Deficit reduction targets have been missed with the govt. revising the budget deficit upwards to 5.9 percent from the earlier 4.5 percent this year. The cycle is complete now – taxes fall as the economy shrinks, more and more people evade taxes to survive and the deficit widens. European leaders however, demand more austerity, accelerating the destruction process.


GBP/EURO – 1.2701
GBP/US$ – 1.5667
GBP/CHF – 1.5260
GBP/CAN$ – 1.5558
GBP/AUS$ – 1.4960
GBP/ZAR – 12.8345
GBP/JPY – 123.62
GBP/HKD – 12.1542
GBP/NZD – 1.9466
GBP/SEK – 10.5069

EUR: The single currency gained some ground yesterday on the back of better-than-expected GDP numbers from Germany and France. While the German economy expanded by 0.3 percent, the French economy managed to remain flat against an expected contraction. The Eurozone as a whole however failed to cheer, contracting 0.2 percent for the quarter, led by Portugal and Spain which shrunk by 1.2 percent and 0.4 percent, respectively. The single currency also gained on hopes that the European Central Bank will deliver on its earlier pledge of safeguarding the common currency, pushing the GBP/EUR down to 1.2680, only to retract later. Better than expected US retail sales numbers triggered a sell off in the EUR/USD pair that ultimately drove the GBP/EUR pair up, ending the day close to 1.2730. It’s a bank holiday in Europe today and markets will take cue from UK developments, especially the BoE minutes due for release later in the day.

USD: The cable surged to 1.5730 from about 1.5700 against the USD in early trade on Tuesday after the latest UK inflation report showed an unexpected spike in July. However, the Pound failed to hold its ground as traders used this opportunity to sell Sterling on hopes the BoE will initiate further quantitative easing measures despite the surge in inflation. The stronger-than-expected US retail sales number supported the greenback as consumer spending rose for the first time in four months, bolstering the recovery theory and diminishing speculations of further assets purchase by the Federal Reserve. Markets will be looking out for UK employment numbers and minutes of BoE’s August MPC meeting. Inflation and industrial production numbers are due from the other side of the Atlantic today. The GBP/USD opens at 1.5663 this morning.
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Have a great day!


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