Foreign Exchange - UK Daily Update - Friday, September 30, 2011 7:41 - 0 Comments

World First Morning Update 30th September 2011: Germans pass EFSF vote but euro slips on retail numbers

Despite the Bundestag’s vote in favour of the EFSF, markets are still very skittish this morning. As we stated yesterday this vote was only to ratify the existence of the EFSF and does not come close to including the EUR 2 trillion that some are looking for. The euro has remained supported as the belief is that we will see some kind of support from EU leaders but I can imagine the support dwindling the longer the silence goes on.

The vote was a fairly easy pass once it was all said and done with Bundestag members voting 523 to 85 to approve the expansion of the European Financial Stability Facility (EFSF). The number of votes within Chancellor Merkel’s coalition was 315; more than the 310 that had been expected. In the debate before the vote Finance Minister Schaeuble said that any immediate increase or change to the EFSF would be “indecent” but did row back some previous comments by stating that he never used the term “lever”. Even so, he stands opposed to a further expansion of the facility anytime soon.

Indeed, Reuters are reporting that Eurozone finance ministers are unlikely to decide on leveraging the EFSF at Monday’s meeting. Apparently they will consider a leveraging method that does not require a new ratification process and that does not trigger rating downgrades of the EFSF bonds or guarantor countries. If only everything was so convenient I guess. We have heard some noises from ratings agencies that the leveraging of this EFSF amount may cause sovereign debt downgrades for the European core and we would expect similar rumblings over the weekend.

Now we all know that it is the Southern part of Europe that has been causing the most problems for the Eurozone but the crisis has now spread to the Southern Hemisphere. Yesterday evening both Standard & Poor’s and Fitch decided to cut New Zealand’s credit rating from AAA. This is the first time in a decade that an Asia-Pacific nation has had its debt cut from that highest of ratings. The reason for the cut was an all too familiar one; expansion of government and household debt is increasing in pace. They also cited that the country’s fiscal position had been hampered by the recent earthquakes and that government spending to repair the damage had hurt budgets. We expect that Moody’s will also lower their rating in the coming days. NZD fell to a 6 month low versus the US dollar on the news with GBPNZD pushing above the 2 level again.

The pound was quiet yesterday although did spike higher after a Swiss National Bank official said the Swiss central bank was likely to increase its holdings of sterling.

We find the euro on the back foot this morning after a stinking retail sales release from Germany. Retail sales fell by 2.9% in August with those surveyed stating that the economic fears over the debt crisis was simply sapping their desire to spend money. While the German economy is still strong, consumers are very sensitive to news headlines and are keeping their hands in their pockets and waiting for the inevitable rainy day.

Today we have Eurozone “flash” September CPI and US personal spending for August and the September Chicago PMI which will give us a good idea of US growth in Q3. This does not mean that the focus will shift from Europe and there are significant headline risks possible from the EU meeting on Monday and Austria’s vote on the EFSF.

Have a good weekend.

Latest exchange rates at time of writing

Indicative Rates	Sell	Buy
GBPEUR	1.1503	1.1525
GBPUSD	1.5548	1.5568
EURUSD	1.3501	1.3523
GBPJPY	119.16	119.39
GBPAUD	1.5959	1.5981
GBPNZD	2.0362	2.0392
GBPCAD	1.6195	1.6223
NZDUSD	0.7623	0.7639
GBPZAR	12.42	12.47
USDZAR	7.9900	8.0165
GBPPLN	5.1004	5.1249
EURJPY	103.50	103.65
Rates are dependent on amount transacted.  Please call 020 7801 9080 for a live rate quote