Monday, 18 June 2012

How does Greek election affect exchange rates

Monday 18th June 2012
Good morning. Today's post is a little later than usual, as I wanted to wait until the markets had opened this morning to gauage the reaction to the Greek elections, and the effect it is having on exchange rates. So what do we have in this week’s Report?
  • Greek election result reduces chances of Euro Exit
  • Bank of England warn on more stimulus
  • Elsewhere in EU Spain/Italy could seek bailout
  • Round up of the week’s other data that may affect rates
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Sterling vs. Euro;

Yesterday saw the results of the Greek election as we saw a close victory for Antonis Samaras and the New Democracy party with 29.6% of the vote. The party has now been given three days to come up with and build a coalition government ready to tackle the on-going debt crisis, something that couldn’t be done just six weeks ago in the first election.













After inconclusive elections in May, world leaders have welcomed the narrow election victory of Greece's pro-bailout New Democracy party. Now, they will try to form a coalition and create a stable government with a stronger popular mandate. So, problems solved?

Not necessarily. The recent vote was eagerly anticipated amid fears that Greece could exit from the euro should the anti-austerity party win. While an exit now looks much less likely, problems could now spread to other Eurozone members and deepen the turmoil in the global economy

The next three days could be very volatile depending on what happens and it will be a case of watch this space to see how investors react to upcoming news over the next few days.

Election aside, last week was a very volatile one with GBP/EUR rates moving between 1.2265 and 1.2470 at mid-market. The movement we saw last week alone would have meant a difference of €2000 between the high and the low on a typical trade of £100,000 to Euros.


Spain Downgraded


Through the week we saw Moody’s downgrade Spain’s rating by three notches to BAA3, one level above junk. The increased debt burden, weakening economy and limited access to capital markets were cited as being the reasons for the downgrade. Moody’s followed on the sentiment of financial markets after the 100 billion-euro bailout of Spanish banks.

Cyprus’s bond rating was lowered by two levels, Moody’s attributed the downgrade to the likelihood of a Greek exit from the euro and the amount of support the government may have to extend to the Cypriot banks. The downgrades show weakness within the Euro zone which in turn drives the rates up and makes it cheaper to buy Euro’s.

Bank of England stimulate economy

As the week progressed, Bank of England Governor Mervyn King unveiled measures to fight Europe’s debt crisis as global policy makers prepared for the impact of the Greek election. The announcement that the case for more UK stimulus is growing, caused the GBP/EUR rate to instantly drop 0.3% when markets opened at 8.00am Friday morning. The GBP/EUR rate soon recovered through morning’s trading.

The Mexico Summit this week will give EU Leaders the opportunity to discuss concerns with the heads of other major economies and should give fuel to increased volatility as the leaders will either agree or disagree on how to combat the escalating Sovereign debt crisis.

So despite the election being out of the way, the future is far from certain. We could well see the Euro weaken more as larger countries such as Spain seek bailouts. Of course the effect the escalating problems in Europe will have on Sterling is impossible to forsee, so all in all nothing has really changed since last week.

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Weekly Economic Data that may affect exchange rates

Monday Markets will be reacting to the Greek election result, which will likely overshadow fundamental data today. Data is light anyway today, with only some Housing Market Data from the USA. There is of course the G20 meeting this week which may affect rates.

Tuesday Quite a bit from the UK today including Consumer Confidence Measures, inflation data, House Price info and Retail Sales. Lots that will show how the UK economy is faring so expect Sterling volatility. In the Eurozone we have some Economic Sentiment measures and Construction data. Over in the states we see Housing Starts and Building permits.

Wednesday Again a very busy day for the UK: Average Earnings, The Bank of England minutes & a raft of unemployment figures. In addition we have the BoE quarterly bulletin. In the EU Germany releases Inflation data. Elsewhere we have some GDP figures from New Zealand, and Interest Rate decision for the USA, and a press conference from the FED.

Thursday The EcoFin meeting starts today, which looks at the EU economy. We also have Inflation data from the Eurozone and Germany. The only UK release of note is the latest retail sales. In the USA we will see the latest Jobless Claims and unemployment figures, in addition to Homes Sales and a Manufacturing Survey.


Friday
The EcoFin meeting continues, and there is also a summit of EU leaders, which will no doubt be dominated by Greece and the debt crisis. There are no UK releases today, but we do have an assessment of the German economy. To end the week Canada releases Inflation data which could affect the countries future interest rate movements.

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