The Balkan Headache is Still Thumping

July 7, 2009

Very quiet in the FX markets yesterday and the USD and the YEN continued to remain firm across the market. The lack of movement in the markets and the support of the USD and YEN can be attributed to a weak assessment by the European policy makers.

ECB president Trichet was very prudent during the latest Financial Stability Review and his tone had a whiff of fear on a further credit crunch within the banking sector.

This concern has been heightened through an article in the Telegraph highlighting dire conditions in the Balkan states, in particular Latvia and Bulgaria. Both nations had their currency pegged to the euro with very negative results as GDP is dropping sharply. Unemployment is increasing and fiscal deficits are rising.

The concern is that this could spill over to lending nations such as Greece, Hungary and Italy. The Balkan headache is still thumping and going forward, could realize significant downward pressure on the euro. No direct effect on the markets as yet but definitely an area to watch.

The Bank of England is still on course this week to ask the government to increase the QE programme. The uncertainty of a recovery is obviously leading the MPC on the train of thought that too much too soon is a better prospect than too little too late.

In other news the Reserve Bank of Australia (RBA) left rates unchanged at 3% adding that economic conditions are better than expected. The AUD is a touch higher on the news.

For the UK this morning we have the release of UK industrial production for May, this is expected at +0.2 month on month. Sterling is looking for a good number to hold its current trading position against the majors.

Yesterday the pound managed to claw back slightly against the euro and remained flat against the USD but still sits in a precarious position ahead of the BoE announcement on Thursday.

Report by Phil McHugh

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