By Sayan Guha.
Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 26th of June.
As the financial crises rolls on without signs of slowing down, central bankers have been accorded a cult status, especially in the US and in EU. The Bank of International Settlements (BIS) thinks central banks have reached the limit of balance-sheet expansion and have exceeded their mandate to support the financial sector.
No one can deny that central banks globally have done an outstanding job. Their books have swelled as they continue to buy huge amounts of govt. debt or offer medium-term cheap loans to prop up banks and credit markets. The combined assets of central banks stood at $30 trillion by the end of 2011, twice the pre-crisis level, and roughly 30 percent of global economies.
However, there are serious flaws lurking beneath. Firstly, governments become reckless and indulge in fiscal profligacy since there’s no disincentive. Banks dither on recognizing bad loans. Also asset prices of emerging markets are pushed up, and the longer this continues, the harder it is to unwind.
The BIS is right in its analysis. However, the problem is that if central banks stopped monetary stimulus programmes, a global slump of unprecedented levels will almost certainly follow. The BIS’s concern that central banks’ credibility and independence may be compromised has definitely its merits, but in the new world order there’s no viable alternative.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2448
GBP/US$ – 1.5582
GBP/CHF – 1.4962
GBP/CAN$ – 1.6022
GBP/AUS$ – 1.5548
GBP/ZAR – 13.1741
GBP/JPY – 124.24
GBP/HKD – 12.0926
GBP/NZD – 1.9748
GBP/SEK – 10.9912
EUR: The single-currency came under pressure yesterday against the GBP and the USD as hopes of a comprehensive resolution to the ongoing debt crisis sank ahead of this week’s EU summit in Brussels, pushing the GBP/EUR pair a high of 1.2468 while the EUR/USD pair slumped below 1.2500. Risk sentiments soured further after Spanish borrowing costs rose and Moody’s downgraded 28 Spanish banks while Cyprus became the fifth country to request bailout money from the region’s life-boat funds. The European economic calendar is weak on the ground today though Italian and Spanish bond auction this morning will grab some attention. The GBP/EUR opens at 1.2473 this morning.
USD: With no Tier 1 economic data due, the forex market remained range-bound yesterday in anticipation over the weekend EU summit. The cable remained range-bound against the greenback although the USD remained in strong demand as risk remained off the table. There’s not much data on the docket from the UK with May public finances report due for release though Spanish and Italian bond auctions this morning may indicate investor mood and risk appetite. The Richmond Fed manufacturing index reading is due from the other side of the pond today. The GBP/USD opens at 1.5611 this morning.
The GBP/USD pair opens at 1.5603 this morning.
