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FX open: Fiscal pact and ESM in Europe

Date: Tuesday 31 Jan 2012

FX open: Fiscal pact and ESM in Europe

The European session is getting under way with the main equity benchmarks showing average gains of 0.7%. The market will be analyzing the outcome of yesterday’s European Union (EU) summit in Brussels, where the so-called fiscal pact was approved. The aim of this is to toughen budget rules for EU members. It was also decided that a permanent European Stability Mechanism (ESM) will be put in place with a capacity for €500bn in credits. The fund will not be leveraged, which raises doubts over whether it will be enough to work as a backstop for Spain and Italy.

The more imminent matter right now is Greece and its debt crisis. European leaders are expecting an agreement to be reached with private bondholders in the coming days in order to restructure Greece’s debt. Greek Prime Minister Lucas Papademos said that talks were ongoing this week with the goal of avoiding international assistance.

In the fx market, the Euro is recovering since the summit. The euro/dollar has moved to 1.32 and the euro/yen is approaching 100.50. The dollar/yen is still being pressured to the downside and falling to 76.25. Cable was finally able to break through 1.57. The Aussie, Kiwi and Loonie are gaining versus the dollar and the yen.

In the sovereign debt markets the German to periphery bond differentials are stable, except for Portugal. The Portuguese risk premium has risen to 1,545 basis points from yesterday’s level of 1,442 bp. The Spanish risk premium is at 325bp and the Italian one at 434bp. The 10-year Bund yield is at 1.79% with the French 10-year's at 3.06%, the Spanish 10-year at 5.04%, and the Italian 10-year's at 6.14%. Meanwhile, the US 10-year yield is at 1.86% and the 10-year Gilt's is at 2.03%.

Several macroeconomic indicators were released in last night’s Asian session. The unemployment rate rose in Japan by one tenth of a percentage point to 4.6%. In Germany, retail sales for December were weak, down -1.4% on the month and -0.9% on the year. Later today, Germany and Italy will present their unemployment rates for January and the Eurozone will release its unemployment figures for December.

In the US, there will be data on fourth quarter productivity and labor costs, the S&P/CaseShiller home price index, the Chicago Fed manufacturing index, and the Conference Board's consumer confidence for January .

Malaysia will hold an interest rate decision today and is expected to keep the key rate at 3.00%.

FM

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