A look at the 14th Euro deal in 21 months… FX report Oct 31By james tweed • Nov 1st, 2011 • Category: Currency
Significant items this week:
Tues 1st Nov AUS – RBA interest rate meeting
EU– Many members have a public holiday.
Wed 2nd Nov US – FOMC meeting – no change expected to US interest rates.
Thurs 3rd Nov G20 – Summit – more details on European bail out.
EMU – ECB meeting
Fri 4th Nov US – Non-Farm payrolls
Thank you for downloading the foreign exchange market report podcast from Coracle Online and Crossbar fx for October 31st 2011.
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Now the foreign exchange markets and the series of agreements designed to keep the Eurozone banks solvent and EMU members afloat sparked a surge in risk appetite towards the end of the week… Equity markets almost erased their summer losses such was the demand. At the 14th emergency meeting in the past 21 months, a comprehensive response was hammered together: the detail is lacking as that will be worked out in November, but the plan has 3 parts:
1. Eurozone banks will be recapitalised to 9% core tier one capital ratios (that’s about Euro 100 billion to make sure they can stomach the losses they will incur on Greek debt and possible losses elsewhere – Italy springing to mind for anyone?!)
2. Private Greek bondholders will be asked to take a haircut of 50%, and
3. The European Financial Stability Facility (EFSF) will be increased to Euro 440bn.
The idea is that these three measures mean that Europe can stand the debt of major countries on the critical list … countries such as Spain and Italy.
Although these measures were met with euphoria throughout the financial markets and the media, after a little pause for thought and some reading between the lines, the same old issues began to surface. The first part is thought to be only half of what’s needed to support the banks. The EFSF couldn’t keep Italy afloat for a year, let alone any other economy in trouble. And in any case, where is all this money coming from? Apparently the Far East: China, Japan and any other sovereign wealth funds. The problem is that as at close of business on Friday, no-one had actually asked them yet! Don’t expect this crisis to be over anytime soon…
What was going unnoticed last week was the improving nature of US economic data – which is quietly suggesting they will avoid a double dip. Q3 GDP has come in at 2.5% . The next big data point for the US will be Non-farm payrolls on Friday.
In the UK the consumer is still reluctant to spend and inflation and unemployment continue to rise. Most observers think these will begin to fall soon, but whether we can grow our way out of trouble is a moot point. The amount people save has soared despite not being able to get any interest. It appears that they would rather have something than nothing should their job disappear.
Thanks for listening