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Spain thinks it can get funds using a lightweight solution of a credit line. This wishful thinking is currently accepted by the markets, who are giving the euro-zone’s fourth largest economy the benefit of the doubt, says Michael Derks of FXPro.  

In the interview below, Derks discusses the EU Summit, the timing of additional British QE, the impact of the US Presidential Elections on currencies and Japan’s dreadful debt dynamics. He ends by explaining why EUR/AUD is so volatile.

Michael joined FxPro in May 2010 having been previously at Deutsche Bank, Rothschild and Schroders. He is a multi-discipline investment and market strategist/economist with extensive expertise in FX, strategic and tactical asset allocation, fixed income, equities, property and alternative assets. An accomplished economic and investment writer and researcher, Michael holds a Bachelor of Economics degree from Macquarie University in Sydney.

  • Do you think that the upcoming EU summit can result in any breakthroughs for Spain or Greece?

Spain is inching towards making an application for funds, but would clearly prefer to avoid asking at all if it can get away with it. The latest idea circulating in Madrid is to see if one of the rescue funds will permit a line of credit to be opened with Spain, in the hope that such a development would further reduce bond yields. Wishful thinking on Spain’s behalf, but so far at least the bond markets and the single currency are giving it the benefit of the doubt.

  • Is the BoE on the verge of another round of QE? How will the upcoming decision impact the pound?

BoE policy-makers likely recognise that further QE will be required at some point, especially as the UK chancellor will need to tighten fiscal policy when he delivers his Autumn Statement. That said, the economy probably grew slightly last quarter and the jobs’ market has been remarkably buoyant. These developments reduce any near-term urgency.

  • Do the elections in the US have a significant impact on the dollar? Or does Bernanke have the upper hand?

The election outcome is critical for the currency. Should Romney win, we can expect that policy-making will be more growth-oriented. He will also adopt a more aggressive attitude to China, at a time when American foreign policy is deliberately setting out to antagonise Asia’s economic superpower. If Obama wins, the concern will be that resolution of the fiscal cliff and the debt ceiling questions will be much more prolonged and fractious. Meanwhile the Fed Chairman is attempting to keep the economy rolling along, with the latest commitment to unbounded QE a very bold initiative.

  • Japan continues enjoying the safe haven status despite a mountain of debt and trade balance deficits. Could the dispute with China over the islands be a tipping point that will make the yen less safe? Or is such a day still very far?

It is certainly the case that the outlook for the Japanese yen is worsening. Safe-haven currencies such as the yen have suffered recently as risk appetite has improved. Also, Japan’s debt dynamics are truly dreadful; the economy is very weak, policy officials are desperate for the currency to weaken and Japan is extremely dependent on petroleum imports transiting the Strait of Hormuz which Iran might be prepared to block at some point. Japan’s relations with both China and South Korea are at rock-bottom. Meanwhile, America has thrown its support behind Japan. Asia has huge potential to become a source of ongoing geo-political tension which would impact all of the major economies in the region.

  • EUR/AUD has been a rather active pair of late. What contributes to the volatility of the pair?

In simple terms, the Aussie is the classic high-beta currency with a central bank that allows the currency to freely float, while the euro is the currency that traders and investors alike have been desperate to avoid over the last couple of years. As a result, the inherent volatility of this currency cross has attracted a huge degree of interest from traders.