Currency watch: frayed nerves in eurozone

While snow blankets the country and most of us would prefer to be curled up in the warm with a mulled wine, the markets have been acting like they have already had a couple of glasses.

Firstly the Irish bailout was announced on Monday; it was mainly in line with what was expected. The desired effect of the package was to calm contagion nerves in the eurozone, however it is pretty clear this did not work.

Portugal has been under strain this week as the Bank of Portugal said that Portuguese banks face enormous levels of risk and may find it very hard to refinance their debt if methods are not implemented to sort out public finances.

They continue to deny the need for outside help, but Standard & Poor’s has warned it may cut Portugal’s rating in the next three months. More worrying is that Spain and Italy are showing signs of contagion, they have been deemed "too big to bail – too big to fail" due to the fact that there simply may not be enough money in the European Central Bank’s (ECB) purse to handle a bailout in the central eurozone countries.

Bonds are the tipple of choice at the moment to help save the eurozone. Italy held a €6.8 billion debt auction this week but paid half a percentage point more than a month ago. While yields on Spanish and Italian bonds rose, and German-Belgian 10 year yield spread was the widest it has been since 1993, not a good advert for the contagion being prevented. The ECB will have held a meeting by the time you read this, apparently to discuss the interest rate, but as that is unlikely to change the meeting would be a valid excuse to unveil new anti-crisis measures, such as the purchases of government bonds.

The Office of Budget Responsibility announced this week that they have raised the 2010 GDP growth forecast to 1.8%, from the previous 1.2%. Likewise they have also dropped the 2011 forecast from 2.3% to 2.1%, this is due to the austerity measures being put in place and a return to normal credit conditions.

UK mortgage approvals illuminated yet more dismal news for the housing market as the number fell to its lowest point in eight months in October. These figures are half the average rate of mortgage approvals and as we have been saying recently, it looks likely to drop even further in the run up to Christmas. US stocks rallied after the ADP national employment change showed its largest jobs gain in three years in November.

Adding 93,000 jobs was higher than analysts expected and an improvement on last month which could mean the labour market is gathering momentum. German unemployment was up significantly, which was a blow to the improving German economy. Looking to the end of the week we have EU GDP brewing and US non-farm payrolls coming up.

Jeremy Cook, chief economist at World First, 03.12.2010