No IMF Aid Package for Italy?

The IMF has denied reports that it is in talks with Italy to grant a multi-billion Euro aid package, following suggestions that they would have to re-direct all their available funds, at the behest of the rest of the Eurozone, in order to do so. At home, traders keenly await tomorrow’s autumn statement by the Chancellor of the Exchequer George Osborne and the OBR report which is expected to indicate further easing. Meanwhile, another long week of bond auctions kicks off with Belgian government debt on offer today. Last Friday Standard & Poor downgraded Belgium's credit rating by a notch to AA and placed its credit outlook on negative. Investors are also eyeing auctions scheduled in four major countries, including Italy on Tuesday and France and Spain on Thursday. Eurozone finance ministers will meet on Tuesday to decide on the sixth tranche of aid for Greece and guidelines for operation of the EFSF. Last week Italy paid a record 6.504% on six-month Treasury bills, while its 2 year bond rate reached 7.814%, a level deemed unsustainable.

Pound Sterling – UK Markets

Sterling is strengthened against the US Dollar as all eyes are on George Osborne’s autumn speech. The Chancellor is expected to announce a further £5 billion in public spending cuts in order to raise funds for new infrastructure and building schemes and stave off a double-dip recession next year. Meanwhile, data released earlier today revealed a decline in UK house prices for November. The British Chambers of Commerce has lowered its UK economic growth forecasts and stated that the risk of the economy slipping back into recession “cannot be shrugged off”. The agency further added that the Bank of England will expand its assets purchase program by £50 billion early next year. On the data front, CBI indicated that sales at consumer and business services companies declined in the previous quarter. We expect Sterling to trade lower against the Euro amid optimism in the Eurozone.

US Dollar – US Markets

The US Dollar is trading weak against major currencies following growing optimism over the Eurozone sovereign debt situation. Concerns over a slowdown in the US eased as estimates indicated that Black Friday retail sales rose by over 6% from last year. Additionally, data from the Institute of Supply Management, slated for release later in the week, is expected to indicate an improvement in manufacturing activity in the US for November. The Labor Department is expected to indicate that payrolls in the US climbed by 120,000 workers, after a rise of 80,000 in October. Uncertainty over the Eurozone bond markets is expected to continue ahead of Belgian, Italian, Spanish and French Government debt auctions due this week. We expect USD to trade weaker against the Euro and Sterling today; however volatility is expected to remain high.

Euro – European Markets

The Euro is trading higher on short-covering, following reports that the IMF was preparing an aid package for Italy. However, an IMF spokesperson clarified that there were no discussions with the Italian authorities on a program for IMF financing. Growing optimism that Eurozone leaders would take essential steps to stem the regions’ debt crisis, has provided strength to the Euro. Reports indicated that finance ministers from the Eurozone, slated to meet tomorrow, are expected to agree to operational rules for the EFSF as well as on guidelines for intervening in the Eurozone bond markets. Concerns over further downgrades continued to persist after Moody's Investors Service warned that the rapid escalation of the Eurozone sovereign and banking crisis threatens the credit standing of all European government bond ratings. The Euro is expected to be volatile with an upward bias, as investors eye French, Italian, Belgian and Spanish debt auction in the coming days.

Other Currencies – Highlights

The Kiwi Dollar rallied against its major counterparts, as the New Zealand Prime Minister’s re-election with his (John Key) party’s biggest mandate in 60 years, strengthened speculation that he would pursue welfare cuts and asset sales to balance the country’s budget. The re-election strengthened hopes that the Prime Minister would expand policies aimed at reducing the economy’s reliance on government spending. Additionally, the Kiwi received a further boost after data indicated that the business confidence index rose in November. We expect the Kiwi Dollar to maintain strength in trade today.