Currency Watch: The world waits on cash injections

As we move into the summer months it has become clear that the markets are waiting for one thing: further stimulus from central banks. And they’re not picky as to where they get it from.

The Bank of England has raised the stakes by adding an additional £50 billion in July but larger injections are hoped for from the European Central Bank and the Federal Reserve.

There are only two things likely to halt the decline in world markets. Either we would need to see a dramatic reversal in the prospects for the global economy, or some form of stimulus is forthcoming. I’ll leave it to you to decide which you will think will be the more likely outcome.

Certainly the Fed (which is at the top of everyone’s list of likely candidates as the provider of further free money) knows that if the situation worsens then they will have to step in.

The economic data globally is poor at the moment but not at the levels seen in 2009. The board may simply be waiting for us to slip closer to the precipice before they act.

I don’t think there is a line in the sand as to when further stimulus will be forthcoming, but some of the catalysts in the back of central members’ minds will include further slips in employment, consumer confidence and inflation.

European debt remains the other side of this rapidly devaluing coin and peripheral debt got a move in the right direction from the publication of the latest austerity measures in Spain. This is Mariano Rajoy’s fourth austerity package since taking the position of PM in November in which he has gone back on significant campaign promises.

His party swept to power on a ticket of not raising taxes, in particular VAT. Yesterday he announced VAT was to rise by 3 percentage points to 21%, all while miners are protesting on the streets.

The total for the new austerity package sits at a whopping €65bn. This would be difficult to swallow in an economy punching out strong output figures, let alone in country in the same situation as Spain finds itself at present.

Spain’s economy is expected to shrink by around 2.5% in 2012 and this will hang like a noose around their neck. At the moment however Spain, and the rest of Europe, is getting more and more competitive as the euro weakens.