The political instability in Holland and potential change of leaders in France were the events that influenced the market a lot last week. The big impact on credit markets in Europe was the downgrading of the credit rating of Spain to BBB+ by S&P. The comments of the head of FRS implied that QE3 was not excluded but postponed. If necessary the FRS might take additional measures of easing. The Bank of Japan kept the interest rate on the same level of 0-0,1%, but broadened the program of assets’ purchasing from 65 billion Yen to 70 billion Yen. Spain is the last one in the list of bankrupt states in the chain reaction that might lead to the collapse of the Euro zone. Last week the profitability of 10 year Spanish obligations exceeded the psychological level of 6 % for the first time since the 1st of December. The European fiscal consolidation policy doesn’t work. On the contrary, this measure gradually leads the countries where the measure is introduced to an inevitable failure, even if they are given financial aid in the form of liquidity pumping. Unfortunately the EU is going in the direction of potential losing of the Euro as a currency. The question is when it is going to happen and what to do in this situation. The growth of the Euro and the Pound might be the signals of the beginning of that process.
Last week the Euro grew against the US Dollar from 1.3104 to 1.3269 and its positions look firm at the moment. The process is supported by the growth of demand for risky assets on the one hand and by the games of EU politicians (fiscal consolidation and austerity measures) on the other. The analysts warn about approaching shift of the trend on the direct opposite one. And the long term forecasts do not suggest anything positive for the Euro. By the end of the year analysts expect the Euro to fall to the level around 1.2500.
The Pound grew against the US Dollar last week. The main reason for the growth of British currency was the decision of S&P agency to downgrade the credit rating of Spain. In addition to that Britain conducted an obligations’ placement auction to the amount of 3 billion Pounds which also contributed to the demand for the Pound. The potential of further growth extends to 1.6450 and higher.