Italians Catch Spanish Fever

The Eurozone debt turmoil has spread to Italy, with the country’s borrowing costs on its three-year bonds skyrocketing to their highest level since December. Meanwhile, German Chancellor, Angela Merkel, played down expectations that Germany alone can solve the Eurozone crisis and warned that German strength is not infinite. In his speech earlier today, the ECB President Mario Draghi, offered no hints of any stimulus measures and transferred the onus on to the region’s politicians to tackle the debt crisis. At home, the BoE Governor, Mervyn King, hit the panic button as he warned that the case for additional easing has strengthened amid rising global economic woes.

Pound Sterling – UK Markets

Sterling steadily slipped against the Euro, after the British government and the BoE unveiled a £100 billion package which aims to provide cheap long-term funding to banks to revive lending. Moreover, the BoE Governor, Mervyn King, indicated that the possibility for infusing more liquidity in the economy through further asset purchases has increased as the outlook for the economy has worsened. Strengthening the Governor’s case, data just released indicates that the nation’s visible trade deficit remained at elevated levels. Minutes of the BoE meeting due for release next week is expected to provide more clarity about the views of MPC members. In yesterday’s session, the Pound managed to climb against the US Dollar and breached the 1.55 mark, after data from the Conference Board indicated that a leading indicator of the British economy climbed for the fourth successive month for April. Moreover, rising hopes of a new round of easing in the US provided a boost to the Pound against the greenback.

US Dollar – US Markets

Calls for a third round of QE increased, after data revealed that inflation in the US slipped below the Fed’s target. Moreover, worries over the nation’s job market escalated, after weekly claimants of jobless benefits in the US rose for the fifth time in six weeks. Meanwhile, US industrial production and consumer confidence data slated for release later in the day is expected to provide further cues about the state of the US economy and would be closely watched by the policymakers, ahead of the monetary policy meeting next week. Recent raft of dismal economic releases have revived hopes of further stimulus measures, especially after the Fed Chairman, Ben Bernanke, indicated that the central bank is prepared to take action intended to protect the US financial system in the event that financial stresses escalate.

Euro – European Markets

A reasonably good Italian debt auction despite rising yields and reports indicating that central banks have formulated plans for coordinated action, if Sunday's Greek elections reach a deadlock, allayed investor concerns and spurred gains in the Euro. In a move to boost sentiment German Chancellor Angela Merkel confirmed that tackling the debt crisis would be the ‘central topic’ at the G20 Summit slated next week. She however, rejected ‘miracle solutions’ and warned that Germany's strength is not unlimited. Nevertheless, the currency took a hit against the US Dollar after another ratings action by Moody’s. The agency slashed its ratings for major Dutch banks and warned that a Greek exit would lead to further cuts. Meanwhile, Egan Jones Ratings downgraded French credit rating by one notch to “BBB+” with a negative outlook. On the economic front, the Eurozone employment data for the first quarter is likely to garner moderate interest. Moreover, Sunday would be a decisive day for the Eurozone as the fate of Greece’s existence in the bloc hinges on the outcome of the election.

Other Currencies – Highlights

The Japanese Yen rallied against most of the major currencies after the BoJ refrained from expanding monetary stimulus, matching market expectations. The central bank indicated a moderate pickup in the Japanese economy amid firm domestic demand underpinned by reconstruction related demand. Additionally, the central bank also pledged to shield the nation’s banking system should the Greek election mark Greece’s exit and fuel a global turmoil. Moreover, the JPY also strengthened on speculation that Japanese exporters would repatriate their overseas earnings before the end of the current quarter. The BoJ’s monthly economic report for June, coupled with the minutes of today meeting slated for release next week, will be keenly tracked by market participants.