Currency Watch: US markets returning after Sandy

Liquidity is gradually returning to the markets as the US East Coast dusts itself off and gets back to work, but yesterday (Thursday) was still a quiet trade day.

The opening risk-on mentality was held on to through the most part of the morning session but started to dwindle as the scale of the clean-up of Hurricane Sandy became clear.

While they haven’t started rebuilding in the US just yet, the effort to rebuild Greece’s finances took another blow yesterday with the publication of the latest Greek budget. The last round of debt/GDP guidance came in March when the deal to haircut Greek debt and provide a further bailout, with the sum peaking at 167% of GDP next year.

This has now been revised to 189% next year and 192% in 2014. Growth is not forecast until 2014 either, but then again, growth was forecast in 2011 following the 2009 budget and we all know how that went. The publication had little effect on euro; the market will wait and see what the Troika says when it releases its findings later this month.

The main European issue remains Spain through November with the market still waiting on the Rajoy government to ask for aid. Rajoy has been unwilling to do anything since the ECB’s “whatever it takes” comment saw yields come lower, but with unemployment hitting 25% and growth contracting for the 5th quarter in a row the need for a bailout will not diminish.

The call for a referendum in Catalonia comes on the back of a swell of civil disquiet around austerity in Spain and the unhappiness of the regions in taking orders from Madrid. Regional leader Artur Mas has called for an early election on 25 November, after his claims for more fiscal autonomy were rejected by the central government last month and we would expect a huge turnout for the separatists. A referendum would never be successful however, given the need for the secession to be approved by Madrid.

Once this event risk is out of the way we would expect to see the landscape become a lot clearer for Rajoy and a request for aid made by the end of the year.

Jeremy Cook is chief economist at World First foreign exchange.