Good morning and welcome to today’s foreign exchange market commentary on Monday, the 5th of October.
Private investors lost about half of their money when Greece restructured its debt early this year while public sector creditors managed to escape unscathed. That may however, change soon. With the latest economic and budget forecasts showing debt-to-GDP ratio hitting 189 percent, a whopping 22 percentage points higher than what Athens projected in March, there are few option other than convincing euro zone governments and the ECB, to write off part of the bond holdings.
The International Monetary Fund, looking at the dire consequences, has called for some kind of official sector involvement. The ECB, currently holding about EUR 40 billion in Greek bonds, said accepting ‘haircuts’ will amount to monetary financing of debt, a strict no-no under its founding treaties while for Germany, it would violate domestic laws.
There are good reasons for rejecting IMF’s appeal for haircuts. For one, it would amount to encouraging profligacy and would make Athens bolder in delaying reforms. Additionally, other stricken states may demand similar treatment, thus multiplying the losses on public debt. Taxpayers of creditor nations can’t be expected to bear this burden indefinitely.
Rather, mild reliefs, such as lower interest rates on loans, may be offered to bring the debt level down to more sustainable levels. Additional funds might also be given to Athens to help it buy back bonds still held by private investors.
Delaying help risks a Greek exit from the currency union, with too much debt on the books. On the other hand, Greece must prove it’s seriousness about reforms, otherwise confidence in the EZ will be badly hurt.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2511
GBP/US$ – 1.6002
GBP/CHF – 1.5090
GBP/CAN$ – 1.5926
GBP/AUS$ – 1.5445
GBP/ZAR – 14.024
GBP/JPY – 128.46
GBP/HKD – 12.3965
GBP/NZD – 1.9378
GBP/SEK – 10.7247
EUR: The common currency slipped against the US dollar on Friday, trading at 1.2820 from a high of 1.2890 after Spanish and Italian PMI came in weaker than expected. The EUR/USD pair continues to trade lower this morning as markets turn jittery ahead of Tomorrow’s US Presidential elections, spiking demand for safer assets. Spain’s weak job numbers, with jobless claims rising to 128.2k in October against expectations of a 90.3k rise, didn’t help the 17-nation currency either. We have the G20 meeting starting this week along with monetary policy decisions from the ECB and the BoE. The GBP/EUR pair has gained in overnight trade and opens at 1.2505 this morning.
USD: The cable continued to trade in a narrow range against the US dollar on Friday despite UK construction PMI coming in stronger than estimated. The construction industry expanded, logging in a reading of 50.9 when markets had forecast a contraction figure of 49.1. US non-farm payrolls data was the biggest draw on Friday and at 171,000 for October, it was well above the 125,000 economists had projected. This triggered a mini-rally with the GBP/USD falling to a low of 1.6010. We have the UK services PMI due in the while US ISM non-manufacturing data will be released in the afternoon.
Have a great day!
