Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 23rd of October.
The first country to exit the eurozone may be Cyprus because it presents the scariest picture in Europe. The country’s president is a Moscow-educated Marxist who also heads the AKEL, the acronym for the Cyprus Communist Party. He became the president of the EU earlier this year which is not a ceremonial position. And he’s not particularly fond of western capital.
But the irony is the island nation may have to seek western capital to bail itself out. The banks in Cyprus were never in great shape given their exposure to Greece. The recent default by Greek government has wiped out bank capital making them insolvent beyond redemption. Some estimates suggest recapitalizing the Cypriot banks would require funds equal to 100 percent of GDP. The country it will run out of cash next month.
But the problem is Nicosia is not cooperating publicly or privately. Greece has learned to go through the rigours of cooperation with the Troika, nodding to strict conditions that it has no intention of executing. Cyprus on the other hand has rebuffed the Troika, stonewalling its austerity proposals. Cypriot political parties and the government must agree to austerity measures before the bailout check is ultimately mailed. EU has plans to bundle Greece, Cyprus and Spain into one package and send it to Finnish and German parliaments for approval. But that won’t be easy, especially after reports that the Bundestag is turning against bailouts, something it never championed in the first place.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2272
GBP/US$ – 1.6014
GBP/CHF – 1.4861
GBP/CAN$ – 1.5902
GBP/AUS$ – 1.5524
GBP/ZAR – 13.8771
GBP/JPY – 127.88
GBP/HKD – 12.4098
GBP/NZD – 1.9602
GBP/SEK – 10.5596
EUR: The single currency gained against most of its peers yesterday after Spanish Prime Minister Rajoy’s People’s Party won the regional elections in Galicia. This added some certainty about Spain’s continuity in the single-currency region amid market speculations that the Iberian nation is now one step closer to seeking a formal bailout. Sentiments got further boost after French President Francois Hollande said he and German Chancellor Merkel consider Ireland to be a special case and are seeking a separate deal for its bank debt. However, Moody’s Investors Service downgraded Catalonia and four other regions Spanish regions yesterday and markets remained mostly directionless in the absence of solid developments. The euro gave up its prior gains today morning as poor corporate earnings dragged the pan-European Stoxx 600 index down. The euro can weaken further against the pound and the USD as there’s very little data coming out of Europe today.
USD: The greenback was on the back-foot against the cable yesterday after an independent report showed UK insolvencies declined in September, boosting confidence in the economy’s recovery. The GBP/EUR pair dropped to 1.2245 as sentiments strengthened further following Spain’s regional election results, lifting the EUR/USD pair as well. Markets will now look forward to Thursday’s Q3 UK GDP reading that is expected to show return to moderate growth. Markets will eye the UK mortgage approvals number this morning while BoE Governor’s speech in the evening will be closely followed for indications on the central bank’s monetary policies in the future. The euro has weakened this morning as European equities slipped following weak corporate earnings results.
Have a great day!
