Tuesday, February 5, 2013

Uncertainty in Italy and Spain Knocks Euro

Following yesterday's drop against the Yen, which was the biggest in 8 months, the Euro also stopped its recent climb against the Dollar.

A number of factors were influencing investor's decisions today, as it became apparent that the risks are to the downside for the Euro and as the outlook for European politics came into play.

Spain's Premier, Mariano Rajoy, has been facing opposition calls to resign as contested reports emerged about illegal payments. Rajoy travelled to Germany on Monday as Euro region leaders schedule a series of meetings for the week in anticipation for a European Union summit to be held on Thursday and Friday.

In Italy, a poll indicated that the former Italian Premier, Silvio Berlusconi, has begun to close the gap on the front runner for the upcoming Italian elections this month, Pier Luigi Bersani. This is despite Berlusconi appealing a four year prison sentence for tax fraud. The elections are scheduled to takes place on the 24th and 25th of February.

The European Central Bank (ECB) is expected to make no change to the refinancing rate, which it has held at 0.75% since July 2012, at its next policy meet to be held on Thursday.

I expect the Euro to stay capped ahead of the ECB meet.

The Euro dropped 0.2% to 124.59 Yen and declined 0.2% to $1.3488. The Yen traded at 92.37 per Dollar.

The Yen earlier had risen against most of its major peers, after Asian equities slid and investors sought haven assets.

The Aussie fell 0.4% to $1.04 and by 0.4% to 96.06 Yen, following the Reserve Bank of Australia's (RBA) decision yesterday to kept interest rates unchanged at 3%. According to the RBA, the inflation outlook allows for scope for further easing.

Investors have deciphered the announcement as meaning that the RBA is ready to ease and is now expected to cut the rate in the second quarter

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