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The momentum of the new leader in Italy and Greece strengthen the EURO

The momentum of the new leader in Italy and Greece strengthen the EURO

The return of some semblance of stability to Europe looks to have encouraged equity markets this morning. Former European Commission Mario Monti has replaced Berlusconi and Italy’s Prime Minister and now leads an emergency government with a mandate to ensure that austerity measures are fully implemented. As ever, the real issue is one of execution and in this, Greece has as much of a culture of failure as Italy has had in the past. This creates some scepticism as to how long any bounce will last. Still Italian 10-year yields are currently around 6.375%, although the true test will be the success of the Italian debt auction at 10:00am this morning.

Foreign exchange markets have shrugged-off events in Italy with euro-dollar drifting from $1.38 to find support at $1.37 as European markets opened. Of course, we had been below $1.35 as late as Thursday to the rally looks impressive, but the single currency faces data headwinds this week. It is suspected that there is some downside risk to the consensus forecast for a 2.3% fall in eurozone September industrial production. The 2.7% fall in German output was much larger than expected and a larger fall in Europe cannot be ruled out, especially as eurozone output grew in August, rather than falling in line with German output. A disappointing number would then put tomorrow’s advance estimate of Q3 GDP back into focus. The market is looking for a 0.2% increase, which would equal the Q2 growth rate. This reinforces the weakness of eurozone growth relative to both the US and the UK, which will limit euro gains for now.

Hopes that the ECB will undertake lender of last resort operations and purchase Italian government debt outright are likely to be dashed by Bundesbank President Wiedmann. The Bundesbank has made no secret of its determination to avoid the ECB monetising debt, even though most believe that it remains the only firewall left should Italian bond yields continue to rise. The ECB certainly has plenty of capacity to ramp up its bond purchases, but politically will only do so in extremis and once austerity measures have been fully implemented in recipient countries. We are still some way off from there.

The Japanese economy grew by 1.5% in the third quarter in line with expectations. This of course follows the earthquake related fall in second quarter output so the bounce in activity is overstated. The economy is expected to accelerate in 2012 as rebuilding work continues, which makes Japan rather rare given the downgrade to 2012 European growth by the EU Commission last week.

The BoE’s Executive Director for Financial Stability Andrew Haldane is due to speak this evening. His speech looks set to argue in favour of dynamic risk weightings, which would see capital buffers lowered in a downturn to encourage bank lending.

What does this all mean for me? Well buying your EUR, USD, AUD or any other currency at the wrong time could cost you a fortune. There is no crystal ball but Currency UK can give you the information you need to make an informed decision.

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