EURO THREATENED OVER IRISH GOVERNMENT ELECTION LOSS

Ireland’s release of its four year fiscal plan seems to have done little to ease market concerns, with the euro remaining on the back foot versus the dollar and sterling. As well as the concerns about Ireland, the threat of similar problems in Portugal and Spain means the euro will likely stay under pressure in the near term. Ongoing tensions in Korea are also weighing as they benefit the safe haven dollar over other majors. Lows of $1.3284 versus the dollar were seen late yesterday, with the break of $1.33 setting the euro up for further losses. Thin volume due to the US Thanksgiving holiday (many traders are likely to be out for tomorrow as well as today) are likely to add to the volatility of currency moves over the remainder of this week. While the euro could well fall further over the coming weeks, few in the market see a return to the sub $1.20 levels that it hit back in June at the height of the Greek debt crisis.

Eurozone politicians and central banks continue their mantra that the euro remains a strong currency, with Axel Weber, president of the German Central Bank and a member of the European Central Bank’s governing council, yesterday describing the euro as solid, and saying that eurozone member states would protect it from speculative attacks, even if that means making further funds available. Eurozone economic data continue to surprise on the upside, including yesterday’s better than expected German Ifo index having little impact. Today sees the release of French consumer confidence and Italian business confidence indices, both for November. Also due for release today is the UK’s CBI distributive trades survey for November which should provide some insights in terms of High Street spending going into the year end

Data out in the UK was positive – revised UK Q3 GDP data released yesterday confirmed that the economy grew by 0.8% in the three months to December. The year-on-year growth rate was confirmed at 2.8%. There was a slowing in the pace of consumer spending to 0.3% from 0.7% in Q2 (though this could pick up again in Q4 ahead of January’s VAT increase), with households contributing 0.2% to the growth rate compared to 0.4% in the previous quarter. The government’s contribution to the economy also fell as fiscal tightening begins to impact, as did the contribution of fixed investment. The traded sector made the first positive contribution to growth for the first time in over a year, accounting for 0.4% of the 0.8%, which in itself seems encouraging. However, as can be seen from the numbers above, this is due to a sharp fall in imports rather than any real improvement in the export growth. Exports rose 2.2% over the quarter, compared to 2.3% in Q2.

All eyes are focused on Ireland, with the ruling Fianna Fail party expected to do poorly in a by-election in Donegal South West. This would reduce the government’s majority in the lower house of parliament (the Dáil) from three to two seats, making the possibility that the current administration will lose support before the budget vote on December 7 more likely. While the markets have arguably priced in the loss already considering it has been well-telegraphed in recent polls, a particularly skewed outcome in favor of the opposition may stoke risk aversion and compound selling pressure on the Euro.

The Euro and the British Pound kept to narrow ranges in Asian trade however it is clear the Euro is being heavily weighed down by sovereign debt risk concerns and ongoing political problems. Fundamentals are strong however sellers are advised to cover positions as the euro is expected to see further weakness short term. Buyers should take advantage of any positive movement and it is always advised that anyone buying used protective Stop orders where necessary.

Tom Trevorrow

Senior Trader

Tel: +0044 1736 335264

Email: tom.trevorrow@torfx.com