Forex Fundamental Analysis

Cast your minds back just four years; sub-prime mortgages were securitised into investment grade securities; markets were bullish; the financial sector could do no wrong

Moody’s have not helped the European sovereign debt crisis, nor the fate of the Euro, by deciding to downgrade Italian debt from A2 to Aa2. The reason that Moody’s cite for the current downgrade (and leaving a negative outlook flag against the Italian economy) is that there had been a “material increase in long-term funding risks for the euro area", due to lost confidence in Eurozone government debts”.

There is no doubt that the motivation of the EU and IMF when granting Greece its first bailout package was to help it avoid the risk of default on its existing financial obligations. Terms and conditions were set for the granting of the €110 billion bailout package and the loan attracted a significant level of interest (between 3 and 5%).

Last week marked the end of Q3 2011. It was one of the worst quarters that the markets had experienced in a decade. But what can we learn from these failures?

The President of the European Commission, Jose Manuel Barroso, has floated the idea that all financial transactions which involve an EU partner should incur a tax of 0.1%

The German parliament is set to vote on whether to endorse a Eurozone proposal to beef-up the European Financial Stability Facility (EFSF).

The devastating earthquake and tsunami that struck north eastern coastal regions of Japan claimed more than 20000 lives and devastated many homes and businesses and smashed the local infrastructure. The estimate for the costs of the reconstruction efforts have been placed at approximately ¥25 trillion (approximately $310 billion – roughly the same size as the Greek public debt).

One of the most “boring” pairs at the moment is the EUR/CHF pair. This is mainly because of action out of the Swiss National Bank recently...but this lull will likely end soon.

The Greek debt is believed to be €310 billion which is an enormous sum of money in any individual’s perception. However, given that the daily total of money involved in forex transactions across the world – alone - has now surpassed the $4 trillion mark it needs to be seen in perspective.

On Monday we saw rumors in the marketplace of the ECB reconsidering the recent covered bond purchase program in order to alleviate some of the pressures in countries like Italy, Portugal, and of course Greece. This has led to speculation that the ECB is considering another rate action soon – but this time in reverse.

Last week was saw all of the world’s major markets close lower on continuing jitters about the pace of the global recovery and sovereign debt and the apparent inability of the authorities to act decisively to fix it.

In principle, as a currency weakens, its exports become more competitive (a good thing), but the cost of imports rises and the worth of foreign earnings generated abroad in other currencies also diminishes when repatriated to the home country.

The world has moved out of recession, but economic recovery around much of the world has been very slow. For a very long time, major nations have been “living beyond their means” and using government bonds to pay for various projects and service debts.

The UK has largely avoided the worst direct consequences of the sovereign debt crisis by being outside of the Eurozone. UK banks are exposed to Greek sovereign debt, but the commitment is relatively small.

Ratings agency Standard and Poor’s has added fresh fuel to the Eurozone sovereign debt inferno by deciding to downgrade Italian debt from A+ to A. Just one more piece of bad news out of the Eurozone.