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FX open: Will the EU summit consider stimulating growth?

Date: Monday 30 Jan 2012

FX open: Will the EU summit consider stimulating growth?

The European session has kicked off with an average loss of 0.8% for the main equity benchmarks. The market will focus on today’s EU summit in Brussels, where the European Council will discuss the so-called “fiscal compact” that will toughen budget rules in the European Union. On the back of poor economic data, the markets also want to see potential strategies to boost growth and job creation. Progress on this front is desperately needed.

Greece remains in the spotlight because it needs to reach an agreement with private bondholders. Both parties announced they were close to sealing a debt swap agreement and that negotiations should conclude this week.

Meanwhile, some analysts are still going over the preliminary fourth quarter GDP data released in the United States on Friday. GDP came in at a 2.8% year-on-year rate of change thanks to a continued rise in consumption on the back of an improving tone for the jobs market. Business inventory investment suggests that companies expect consumers to continue spending. Public spending and net exports were detrimental to the growth figures.

In the fx markets, we see the euro declining ahead of the EU summit. The euro/dollar changed course at a six-week high of 1.3221 and the euro/yen is moving towards 101. Meanwhile, the dollar/yen trades at 76.67 and cable remains near 1.57. The Aussie, Kiwi and Loonie are falling versus the dollar and the yen.

In sovereign debt markets, the German to periphery debt differentials continue to decline. The Spanish risk premium fell to 311 basis points and the Italian one to 406bp. The 10 year Bund yield is at 1.86% with the French 10-year's at 3.05%, the Spanish 10-year at 4.97% and the Italian 10-year at 5.92%. Meanwhile, the US 10-year is moving down to 1.87% and the 10-year Gilt is at 2.07%.

Looking at the macroeconomic calendar for today, Spain reported a fourth quarter GDP contraction of -0.3% year-on-year compared to 0.8% in the previous quarter. Later today, there will be confidence data for January in the Eurozone and CPIs for January in Germany. In the US, there will personal income and personal spending data for December and the Dallas Fed manufacturing index for January.

Not much to report in regards to central banks. However, European Central Bank president Mario Draghi said on Friday that a credit crunch has been avoided.

FM

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