EUR USD (1.3200) A two-notch S&P downgrade with a negative outlook for Spain has come as a result of the risks to the country’s budgetary performance from shrinking economic growth. This downgrade seems to support a recent wave of opinion against austerity. For investors, Spain (as well as Britain), has become a model for how austerity can result in a downward spiral that pushes deficit targets further away. This belief explains recent talk about growth measures, although it is not clear which. Italian Prime Minister, Mario Monti, has publicly urged a policy of growth citing austerity measures which ‘if anything, are deflationary’. Even Draghi has conceded to a move for a growth compact. French presidential candidate, Francois Hollande, is also a supporter of growth measures, however, in a TV interview yesterday evening he presented an opinion of deficit spending for growth, something that is not supported by Chancellor Merkel. He also explicitly excluded the liberalisation of restrictive employment practises in groups such as taxi-drivers and pharmacists, an idea that is supported in Germany. So the only consensus so far in this new ‘growth’ movement is that further austerity may be self-defeating. However, what policymakers mean by growth measures is either in conflict with each other or not explicitly mentioned at all. The euro stabilised yesterday, so we now look for gains to 1.3350. In case of a dip to 1.3175, we would embark on a bullish strategy with a risk-limit set at 1.3125.
Click here to read the full report: Daily forex 04.27.12
Deutsche Bank