Morning Currency Wrap for Thursday March 24, 2011

Spanish Bank Downgrades & Portugese Government Collaspses, Euro Up - News yesterday that Portugal's prime minister quit after parliament rejected his government's latest austerity measures and today's downgrade by Moody's of the Spanish banking sector was basically a nonevent for the Euro. The Euro initially fell but recovered quickly as the market's main focus remains on one thing, the near certain rate hike by the ECB in the first week of April contrasted against ultra easy US monetary policy. The fall of the Portuguese government increasing the chances that the country will need a bailout of around 80 bln Euros to cover the next three years of its financing needs. If you think about it, the downgrade of the Spanish banking sector is a non factor because they will receive a backdoor bailout via Portugal's bailout, since Spanish banks hold most of Portugal's debt. All of this puts added pressure on the 27 euro zone members to formalize a plan to deal with its sovereign debt crisis at the starts of today's 2-day EU summit. Don't hold your breath because leaks from the parties involved suggest that the conclusion of this summit will be to reach a final deal before June as the foot dragging continues. Elsewhere, the GBP lost ground for a second straight day after a larger than expected fall in retail sales in February raised concerns over the prospects for UK growth. This data suggests that the retail sector is cooling off at a fast pace compounding the Bank of England's next move in the face of higher inflation. In Asia, the song remains the same as USD/Yen remains glued to the 81 Yen level as market players are wary that Japan may intervene further to sell the Yen if the USD drops below the 80 level. Meanwhile, the NZD was the strongest performer as data showed the country’s economy avoided a recession in the fourth quarter. GDP rose 0.2%, spurring relief that the economy was in reasonable shape ahead of the earthquake that hit the country last month. In Canada, the CAD was stronger against the USD on firmer oil prices despite the expected no-confidence motion that will likely bring down the federal government. If the opposition parties does bring the government down then a early spring election is expected, but one that might not change the political landscape. It's a case of heads you win, tales you win - the election will result in one of two things, a minority government, which is what Canada has now, or a Conservatives majority government, in which case the CAD would strengthen even more.