Persistent Tensions Surrounding the Italian and Spanish Economies


The Euro was unable to make a fresh challenge on resistance levels above 1.24 against the dollar on Wednesday and generally drifted lower during the day with a test of short-term support levels, although net ranges were narrow.

The German economic data provided no significant support for the Euro-zone with imports and exports declining for July while there was a 0.9% decline in industrial production for the month. Germany's credit rating was affirmed at AAA by Fitch which provided some degree of support while there were downgrades from Italy and Spain according to a minor ratings agency.

The troika announced that it would spend all September in Greece assessing the situation and there were further tensions ahead of the August 20th scheduled payment to the ECB amid some expectations that Greece could be forced to default or be forced into covert ECB support.

There were persistent tensions surrounding the Italian and Spanish economies as behind the scenes discussions on sovereign bailouts continued. There were further suggestions that Spain would not accept a bailout if further conditions were imposed. The elements of blackmail evident in the discussions are unlikely to provide significant Euro support. There were still expectations that the ECB would move to bond buying in September once the German constitutional court has ruled and this continued to provide net Euro support during a Summer lull.

The Euro found support on dips to the 1.2330 area before moving higher again with consolidation the general theme. There was a rise in yields at the latest US Treasury auction and investor demand also faded which suggests that defensive demand for Treasuries and the dollar has eased slightly. The Euro edged higher during the Asian session on Thursday with no fresh incentives.


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The dollar found support close to the 78.25 area against the yen on Wednesday and moved higher later in the US session. There was an underlying improvement in risk appetite which helped curb yen buying and the dollar also gained support from a widening in the US Treasury yield gap over Japanese bonds to a two-month high.

There was speculation that the yen would gain net support during the month from bond redemptions and this continued to provide underlying support for the Japanese currency.

The Bank of Japan left policy unchanged at the latest monetary meeting which provided a small yen boost given expectations that there could be a move to relax policy further. There was a 5.6% recovery in machinery orders for July following a 14.8% decline previously.


Sterling drifted weaker in early Europe on Wednesday, although there was no test of support in the 1.5550 region.

As expected, there was a downgrading of growth and inflation forecasts in the latest Bank of England inflation report with 2012 growth now expected to be around zero compared with 0.8% previously. The bank remained generally pessimistic over the outlook and also expressed major uncertainty surrounding the outlook given the Euro-zone outlook.

Bank Governor King stated that the bank would be ready to take further monetary action if necessary. He also stated that the potential benefits of an interest rate cut would be more than offset by the potential negative effects, especially as it would be a considerable burden for some financial institutions.

Markets had already priced in a downgrading of forecasts and the comments in downplaying the possibility of an interest rate cut were significant in pushing Sterling higher. It peaked close to 1.5670 with the Euro weakening back through the 0.79 level.

Swiss franc

The dollar found support below 0.97 against the franc on Wednesday and peaked close to 0.9750, but was unable to sustain the advance while the Euro remained trapped close to the 1.2010 level during the day.

National Bank policies remained an important focus amid some persistent speculation that the minimum Euro level could eventually have to be abandoned if intervention activity was forced higher. Euro-zone developments will inevitably be watched very closely during the next few days as uncertainty remains extremely high.


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Australian dollar

The Australian dollar found support below 1.0550 against the US currency on Wednesday and pushed higher to a peak around 1.0580 in lacklustre trading conditions with solid selling interest on rallies.

The labour-market data was slightly stronger than expected with a 14,000 increase for July following a 28,300 increase the previous month with unemployment edging lower to 5.2%. The Chinese growth data was slightly weaker than expected with industrial production growth slowing to 9.2% from 9.5% and the Australian dollar was unable to sustain a move above the 1.06 level following the data.


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