Royal Alliance Capital Currency Review

Berlusconi exits as debts spiral

The 17-year political career of Silvio Berlusconi came to an end on Saturday, whilst Italy attempts to contain its current debt levels from spiraling out of control.

Berlusconi’s departure came after the country's lower house of parliament approved an urgently needed package of economic reforms designed to tackle the country's €1.9 trillion debt, revive its sluggish economy and prevent it from going the way of Greece. Sunday saw the appointment of Mario Monti. His task is to form a new government in an effort to shore up Italy’s government bond market; the third largest in the world.  

Euro fears escalated on Thursday as Italian bond yields went through the critical 7% level, prompting concerns a bailout will be needed. Sterling reached intra-week highs of €1.1784, taking the exchange rate to its highest level since March.

Euro zone economic data offered little support to the single currency. Investor confidence data weakened to a two-year low, whilst there was a 0.7% decline in European retail sales for October. There was also a 2.7% slide in German industrial production, whilst the EU Commission cut the 2012 growth outlook sharply to 0.5% from 1.8% previously.

Sterling fell to lows of $1.5864 versus the US dollar, before reversing losses on Friday to finish the week at $1.6080.  As widely expected, the Bank of England (BoE) left both interest rates and quantitative easing (QE) on hold in Thursday’s meeting. Markets will await the release of the meeting’s minutes on 23 November to find out the voting pattern of the Bank’s policymakers. Industrial production remained flat in September, whilst manufacturing rose 0.2%; its first rise since May this year. However, the UK’s trade deficit widened from £8.6bn to £9.8bn, increasing the risk of a downward revision to UK economic growth in the third quarter of 2011.

In a sparse week for economic announcements, the US dollar found itself tracking investor sentiment and the performance of global stock markets. With mid-week developments in Italy taking a turn for the worse, the US dollar added over three cents versus the euro. However, the dollar’s gains were short lived. Rumors of Berlusconi’s departure buoyed global markets, as the dollar pared gains made earlier in the week.

The Chinese yuan was unable to make any headway during the week as consumer inflation showed a decline in September. The Swiss franc continued its recent decline against both the pound and euro as Swiss consumer inflation data proved weaker-than-expected. Global commodity prices remained fragile, hindering the performances of both the Australian and New Zealand dollars. An increase in the number of new homes being built in Canada helped the Canadian dollar gain over half a cent versus sterling.