Optimism
that Europe’s leaders could come up with a solution to the debt crisis
has risen in recent days, and the news continues to dominate currencies
around the world. On Wednesday last week, central banks around the world
announced that a new wave of cheap USD liquidity would be provided to
Europe’s banks, which gave us a stronger (more expensive) Euro and a
weaker (cheaper) US Dollar, with better rates for sending USD payments.
The EU summit on Friday should see further announcements, with any
progress likely to strengthen the Euro further. Angela Merkel and
Nicolas Sarkozy are meeting this week in advance of the summit, in a
crucial week for the future of the single currency area. US Treasury
Secretary Timothy Geithner will also be meeting European leaders ahead
of Friday.
Markets
have welcomed Italian austerity measures this morning, and Italian bond
yields have fallen, easing pressure on the economy. Irish Prime
Minister Edna Kenny has warned the nation to prepare for a tough budget
this week. Any signs that debt-laden countries are bringing their debts
under control is again likely to lead to a stronger Euro, and lower
rates for exchanging sterling to transfer money in Euros.
Last
week in the UK also saw George Osborne’s autumn statement, which
fortunately did not seem to weigh too heavily on sterling. The UK
economy is still showing marginal growth, but the Pound would likely be
under pressure should that change to negative growth and a second UK
recession. This morning’s service sector PMI survey showed encouraging
growth, although UK business confidence fell from its October high.
Elsewhere, we saw exchange rates for buying Australian, New Zealand and Canadian Dollars as well as for transferring Thai Baht and South African Rand fall back, as investors started to move back into these ‘riskier’ currencies.
This
week, we have interest rate decisions in the UK, Eurozone, Australia,
New Zealand and Canada; interest rate changes usually affect a currency,
with a rising interest rate giving a stronger currency making it more
expensive. The UK announcement on Thursday comes at the same time as any
extension to Quantitative Easing, and if the pressure on the Bank of
England to increase its asset purchase scheme results in more QE, we
would also expect the Pound to fall.
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