Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 24th of January.
Policymakers across the globe welcomed 2013 with cautious optimism. After all, the US didn’t go over the fiscal cliff. Europe came back from the brink. China averted a hard-landing while Japan took steps to change its economic policies.
US equity markets are on multi-year highs. Major financial institutions on both sides of the Atlantic are better capitalized than they have been for years. Banks have managed to plug the holes in their balance-sheets and some players are flush with cash. 2013 may go down as the turnaround year even though it may not be the perfect banner year.
Political uncertainties however remains almost everywhere. China’s leadership change takes place amidst high level of public concern about corruption in the government. Crucial elections are due in Italy and Germany while the US faces uncertainties over fiscal hurdles. There is the possibility though that politics will be less abrupt as gradual recovery takes place, reducing uncertainties and accelerating the recovery further. So unless things go terribly wrong, politics is unlikely to derail the recovery process.
The threat however emanates from somewhere else. The growth strategies of the major global economies may not add up after all. Economists across the world agree on only one proposition; the sum of all trade balances must be zero and much time is being spent on designing an export-led growth strategy consequently. Barack Obama had set the target of doubling US exports by 2014 and half-way through the mark, US is well set to meet the target.
In Asia, new Japanese PM Shinzo Abe has depressed the yen already while Chinese exports have grown faster than anticipated. The peripheral countries in Europe can reduce their debt only by running trade surpluses. With the ECB signaling a weak currency policy in the days ahead, export driven growth seems to be their strategy as well.
But where are the extra imports going to come from to support this export boom? A booming global economy can support a single country or region to deleverage. In a weak economic atmosphere, major economies can’t expect lower interest rates will translate into weaker exchange rates and an improved trade position. Strong austerity measures will reduce demand for imports and the situation can be reversed by accommodative policies by central banks.
The message for policymakers is clear; international coordination is required to offset the effects of excessive austerity. The G-20 and the IMF can play a pivotal role to ensure that in 2013. Otherwise the global growth forecasts may remain distant dreams.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1892
GBP/US$ – 1.5832
GBP/CHF – 1.4738
GBP/CAN$ – 1.5844
GBP/AUS$ – 1.5068
GBP/ZAR – 14.3285
GBP/JPY – 141.52
GBP/HKD – 12.2762
GBP/NZD – 1.8832
GBP/SEK – 10.3250
EUR: The shared-currency struggled against the USD in early trade yesterday, falling to a week low of 1.3302 as the US lawmakers prepared to vote on suspending the country’s debt limit until May 19 to avert any potential default. Also lack of any economic data from the eurozone failed to provide the common currency any real direction. However, ECB President Mario Draghi’s assertion that the worst may be over for the currency block late Tuesday night provided some support and the EUR/USD pair opens at 1.3330 this morning. Data out of Europe has been mixed so far this morning with German manufacturing and services PMI printing above expectation whilst PMIs came in weaker than anticipated. Euro managed to hold its ground against the GBP yesterday despite UK unemployment rate falling below expectations and the GBP/EUR pair opens at 1.1884 this morning.
USD: Sterling came close to falling below the 1.5800 level yesterday after the release of key employment data. But the GBP/USD pair eventually bounced back 0.1 percent to 1.5845 after Prime Minister David Cameron announced he would hold a referendum on continuing in the EU if he is re-elected in 2015. Markets got some relief after he said it’s not the right time to hold a referendum since the currency union is going through uncertain times. The BoE MPC minutes released after the PM’s speech showed majority members voted in favour of keeping the monetary policy unchanged. The GBP/USD pair rose to 1.5885 after UK unemployment came in at 7.7 percent against expectations for 7.8 percent. Cable has given up some of yesterday’s gains overnight and GBP/USD opens at 1.5840 this morning.
Have a great day!
