A Changing Political Landscape

Spain is the latest of the Eurozone countries to have seen a change in their government this week. After winning the Spanish parliament election on Sunday, the People’s Party leader, Mariano Rajoy, pledged to cut the country’s budget deficit and regain the nation’s AAA credit rating. Ireland, Portugal, Greece and Italy have all already appointed new leaders since the emergence of the debt crisis. At home, with the expectation of weak growth, the prospect of more aggressive QE looms large. It remains to be seen if the new governments will be able to lift market sentiment as they face the daunting task of lowering borrowing costs by implementing a series of unpopular austerity measures. The Director General of the Confederation of British Industry (CBI), John Cridland, has stated that the effects of the ongoing sovereign debt crisis in the Eurozone, and fears of a second banking crisis in 2012, have hit the country’s business confidence.

Pound Sterling – UK Markets

Negative news flow and persisting concerns over the health of the British economy continue to weigh on Sterling. The CBI, in its latest business survey, has revealed a steep fall in business confidence amongst the UK’s most influential business leaders, with 70% of those interviewed indicating that they felt the economic outlook had worsened since August. Moreover, UK houseprice data from Rightmove, released earlier today, has seen an unexpected decline in November. Meanwhile, former Monetary Policy Committee member David Blanchflower, has stated that the Bank of England is still too optimistic in its outlook, opining that 'quite a lot more QE' or stimulus would be required in 2012. With no major economic release slated for today, we expect Sterling to trade according to cues from the Eurozone news flow.

US Dollar – US Markets

Speculation over the US congressional committee struggling to enter into an agreement over deficit reduction measures by the November 23 deadline and looming concerns over the European debt crisis, has fuelled risk aversion amongst investors and led the US Dollar higher against the majors in trading this morning. Moreover, the currency gained ground after data indicated a sharp increase in the foreign bank deposits at the Federal Reserve to $715.0 billion from $350.0 billion since the end of 2010, amid Europe’s debt turmoil, reinforcing the US Dollar’s position as the global reserve currency. On the economic front, data scheduled for release today is expected to show a decline in existing home sales in October, amid falling property prices. We expect the USD to continue to remain strong in today’s trading.

Euro – European Markets

The Euro is trading under pressure against major currencies amid the changing political landscape in Spain, as the nation’s opposition party won a parliamentary majority thereby ejecting the ruling Socialists. The currency witnessed increased selling pressure after EU Economic Affairs Commissioner, Olli Rehn, painted a dismal picture of the region’s economic scenario and stated that Europe's sovereign debt crisis was hitting the core of the Eurozone and that there should be "no illusions" about this. Meanwhile, ratings agency Moody's indicated that a recent rise in interest rates on government debt and weaker economic growth prospects could have a negative impact on France's credit rating. With the Eurozone’s current account data being the only economic release scheduled for today, investors await speeches by European Central Bank officials Ewald Nowotny, Erkki Liikanen and Juergen Stark. We expect the Euro to trade lower against major currencies ahead of the French bill auction scheduled for today.

Other Currencies – Highlights

Concerns over a slowdown in the global economy and contagion risks from the sovereign debt issues in the Eurozone provided strength to the Yen. The Yen strengthened against the US Dollar after a Democratic aide indicated that the US congressional committee is likely to announce later today that it has failed to agree on deficit cuts. On the economic front, data indicating a greater-than-expected fall in the Japanese exports for October signals more economic weakness. The central bank has indicated that the government debt woes in Europe were hurting Japan and emerging economies. On the positive side, Japan’s Franchise Association reported that, on an annual basis, the nationwide convenience store sales in Japan rose 14.1% in October. We expect the Yen to strengthen further today, as a fall in equity markets across Asia and Europe is likely to boost the demand for safe haven currencies.