Spain’s bailout provides temporary relief
Over the weekend, Spain asked for as much as 100 billion euros to ensure the survival of its banking system. This news re-assured investors that Europe was tackling its debt crisis and the euro rallied more than a 150 pips higher to a three-week peak against the dollar. Riskier assets and commodity-linked currencies also surged higher and the Aussie traded briefly above parity against the greenback at the start of the session. Asian stock markets closed much higher, with the Nikkei recording a 1.96 percent gain, while European markets opened sharply higher. Risk appetite was also boosted by less bearish than feared Chinese trade data.
Spanish Prime Minister Rajoy had to surrender to his European counterparts as his country sought out a financial bailout, making Spain the fourth member of the currency bloc to request aid. He had stated only two weeks ago that Spain wouldn’t need aid, only to be proved otherwise. This move may weaken his political authority and credibility among investors in financial markets, and may as well spur skepticism on his ability to fulfill his deficit-cutting promises.
The euro pared its initial gains after the start of the European session, as Spain’s bailout fuelled concern that the sovereign debt crisis is deepening and spreading among indebted nations. The bailout also pushed Italy back to the limelight of the crisis as speculation grew that Europe’s third largest economy may be next in line to succumb to the crisis. Investors were also skeptic ahead of a crucial week for the fate of the bloc as Greek elections on June 17 will decide Greece’s future within the common currency area. Spanish and Italian 10-year bonds reversed earlier gains and fell for a fourth straight day on Monday. The Spanish yield climbed 21 basis points to 6.42 percent while the Italian 10-year rose 24 basis points to 6.01 percent.
Meanwhile also on Monday, statistics showed that Italy’s economy shrank 0.8 percent in the first quarter of the year compared to the last quarter of 2011, confirming the preliminary reading, but annual GDP figure was revised lower compared with the same period last year to -1.4 percent versus -1.3 percent. EUR/USD fell to 1.2528 after hitting a three-week high by 1.2669 earlier in the session, but was still higher compared to Friday’s close by the time of writing. The single currency also rallied to a three-week high against the yen to 100.92, but trimmed its gains and fell to 99.43. The outlook for the single currency remains shaky as we await the results of Greece’s elections. A win for the parties opposing the austerity terms of the nation’s bailout could trigger a sharp decline for the euro, and send it as low as to test the 2010 low by 1.1876 against the greenback.
This week from the monetary policy front, we have central bank meeting from New Zealand and Japan, and more importantly the Swiss National Bank will announce its decision on June 14th regarding the floor EUR/CHF which is currently set at 1.2000.
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