Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 3rd of January.
The consensus economic forecast is that the worst is behind us now and a gradual recovery will be witnessed in the common-currency bloc now. The problem with consensus forecasts is that they are mostly wrong. Hence rather than recovering that economists would have us believe, it is more likely Europe will sink deeper as social and political tensions intensify during the year.
It is hoped that German Chancellor Angela Merkel will remain fully committed to the euro ahead of general elections in September while Mario Draghi will now follow through on his earlier commitment to buy short-term Spanish and Italian bonds to keep government borrowing costs under check.
Unfortunately, an ECB intervention will not be sufficient to prevent a deeper crisis. ECB support would require peripheral countries commit themselves to multi-year spending cuts. The programs, similar to the ones proposed by the European Commission, requires deficit reductions of between 2 and 3 percentage points of GDP every year, a tough call when economies are shrinking. It’s difficult to see how severe austerity measures will not deepen the crisis in 2013.
Another reason that may derail the recovery process is deterioration of the political environment in the peripheries. Popular discontent and severe backlash have already hit many ruling parties hard. As the unemployment-rate rises further, especially in Greece and Spain where youth unemployment rate is over 50 percent already, political stability will become the first casualty.
Also Greece finally making an exit in 2013 could become a reality despite the third rescue package that the Hellenic nation recently managed to secure. Since the Greek economy is expected to shrink another 4.5 percent in 2013, a potential exit can’t be ruled out if the present ruling coalition falls and the extreme-left Syriza Party, vehemently opposed to the IMF-EU imposed policies, manages to grab power. Policymakers around the world should take note that an economic blowout in Europe poses a major risk to global recovery.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2342
GBP/US$ – 1.6222
GBP/CHF – 1.4941
GBP/CAN$ – 1.5982
GBP/AUS$ – 1.5454
GBP/ZAR – 13.8284
GBP/JPY – 141.36
GBP/HKD – 12.5752
GBP/NZD – 1.9445
GBP/SEK – 10.5596
EUR: The single-currency rallied against the US dollar yesterday, rising close to its eight-month high before falling to 1.3160. The early gains due to positive German preliminary inflation data were tempered after data released showed the eurozone sinking further into recession with Spanish and Italian manufacturing PMI shrinking in December. Manufacturing in the eurozone has been on the decline since August 2011 and yesterday’s data showed the trend is far from over. We have German and Spanish unemployment data due today and any change in Spanish unemployment levels can influence the euro. The EUR/USD pair opens at 1.3150 today morning.
USD: Risk appetite returned to markets yesterday following the budget deal between Democrats and Republicans, pushing the greenback to a 16-month low against sterling. After trading above the 1.6350 level yesterday morning, cable quickly fell below the 1.6250 level in the afternoon after UK manufacturing PMI printed higher at 51.4 in December, the highest in fifteen months. We have the latest Federal Open Market Committee meeting minutes due for release today along with US ADP employment data. We also are due for the British Construction PMI reading today and any reading above the crucial 50 level will lend further support to cable. The GBP/USD pair opens at 1.6230 this morning.
Have a great day!
