Forex Flash: Reasons for optimism in Iberia – UB

German Chancellor Angela Merkel did her very best to express support for her beleaguered Spanish counterpart on Monday in Berlin. Although her fiscal prognosis for Spain may be open to question, she did state that 'Spain's exports are posting their best performance for 30 years'. According to Research Analyst Gareth Berry at UBS; “Debatable in practice, basic theory in FX stipulates that improving exports helps the trade balance, and the consequent balance of payments improvements should also help the currency.”

Trade deficits are indeed narrowing sharply and contributing to overall current account gains: Spain's current account deficit is close to a euro-era low, while Portugal's deficit drop is even larger - recovering from -12.6% in Q3 2008 to -2.49% in Q3 last year. Of course, it has taken time for the improvement to actually translate into euro strength.

Initially, fears over current account financing without the ability to devalue risked sending these countries into an outright balance-of-payments crisis. “With official help and of course, domestic austerity, this was averted and largely put a stop to euro buying.” Berry notes.