The Spanish dilemma

The Spanish dilemma

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 18th of October.

As the EU summit meet starts in Brussels today, all eyes will be focused on the outcome with hopes of some decision on Spain. We all know that Spain is imploding; higher taxes have resulted in lower government revenues and the banking crisis seems to be worse than previously thought.

Spain can apply for direct credit from the ESM once it applies for a bailout formally and agrees to the “troika’s” terms. The ECB will step in to buy bonds from the secondary markets. That’s what we all know.

One of the reasons why Spain has delayed the bailout request is the uncertainty over approval. Spain has gone on record to say it won’t apply for aid unless it’s sure of receiving it. That’s a little unnerving. According to media reports, Germany’s Merkel has sent out strong signals to Spain to hold off as she’s wary of presenting a fresh bailout request to the Bundestag. Given all the hue and cry over how the Spanish crisis is going to be resolved and how a more unified Europe can move forward, there’s one obstacle; it’s the German parliament. Not all eurozone parliaments; only Bundestag can veto any resolution. That’s because of the rulings of the Constitutional Court.

German Finance Minister Wolfgang Schauble and Chancellor Merkel wants Madrid to wait because they think a Spain teetering on the brink of a default will have better chances of securing a bailout-approval from the parliament. The common perception is that Rajoy is negotiating with the EU for a bailout. But the fact is he’s negotiating with the Bundestag, which is much less benevolent. At this critical hour of Spain, democracy seems to be the biggest hurdle for an emergency deal.


GBP/EURO – 1.2304
GBP/US$ – 1.6126
GBP/CHF – 1.4892
GBP/CAN$ – 1.5778
GBP/AUS$ – 1.5538
GBP/ZAR – 13.8312
GBP/JPY – 127.72
GBP/HKD – 12.4932
GBP/NZD – 1.9628
GBP/SEK – 10.5852

EUR: The single currency gained momentum yesterday with the EUR/USD pair hitting a month high of 1.3120. Euro strengthened against the pound as well, peaking at 1.2285 before closing a little lower at 1.2304. Rating’s agency Moody’s decision to continue with Spain’s Baa3 rating was cited for the single currency’s strength yesterday and it remains well supported ahead of the EU summit meeting in Brussels today. Spain’s 10-year bond auction went off successfully today morning with yields dropping to 5.46 percent from 5.67 percent in the previous month. The GBP/EUR pair is trading around 1.2325 now.

USD: A general ‘risk on’ attitude ensured the US dollar weakened yesterday, pushing the dollar index, a gauge of the greenback’s strength against a basket of six currencies, to 79.022 from 79.371. A better-than-expected housing starts data for September triggered the rally, causing a near-sellout as demand for safer assets diminished. The pound gained ground after yesterday’s robust jobs data was followed up by better than expected retail sales number today morning. The dollar’s movement will depend a lot on announcements from Brussels today. We have the weekly initial jobless claims and the Philly Fed manufacturing index data due from the US today and positive reading may weaken the greenback further. The GBP/USD pair is trading around 1.6170.

Have a great day!


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