Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 6th of November.
Cyprus has been hitting the headlines for some time now because its banks are insolvent now and it is running a very large and rapidly growing budget deficit. It has lost market access and its bonds are rated close t junk. The banks are living off emergency liquidity measures from the ECB, but that may end soon as ECB is not permitted to lend to insolvent banks.
The virtually bankrupt nation applied for a pre-emptive EU aid in the summer. The troika submitted a reforms plan after visiting Nicosia on July 25. Though the troika made in clear that the deal must be ready before the eurozone’s finance ministers scheduled meet on November 12 to be considered this year, Cyprus rejected the proposals after waiting for two months.
The government, have been urging the troika since to return to Nicosia for further negotiations. But to this date, communist president Dimitris Christofias and his finance minister are waiting for the euro-group to call back.
In between something important happened. German Finance Minister Wolfgang Schaueble told the media Cyprus has missed the November deadline and it can apply only next year. But the island country is expected to run out of money much before that. That means Merkel and Europe has abandoned Nicosia.
But it’s more likely that Berlin will step in with EUR 10 billion aid to prop up the island’s banks. That will present Merkel with a major dilemma since the real beneficiaries will be Russian oligarchs and Mafiosi that have deposited their illegal money in Cypriot banks. With a minuscule GDP of EUR 17.8 billion, the nation’s banks manage Russian deposits worth EUR 21 billion. With low tax rates, Cyprus is known for its lax regulations that actively encourage money laundering. The country has a long history of doing business with the Greeks. The nation’s banks generously bought Greek debts which have turned practically worthless now.
But refusing aid is not option since that may risk the collapse of the currency union. Merkel, a great believer of the domino effect, may have to face other questions; why would Europe save giants like Spain and Italy if they can’t save dwarfs like Cyprus? German share of the aid amounts to EUR 2 billion and poses new troubles for Merkel who is already having difficulty justifying never ending aids to Greece who keeps coming back with new excuses for missed targets. Cyprus is no longer an economic problem, but has turned into a political one for the German Chancellor.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2505
GBP/US$ – 1.5981
GBP/CHF – 1.5096
GBP/CAN$ – 1.5913
GBP/AUS$ – 1.5329
GBP/ZAR – 13.9545
GBP/JPY – 128.01
GBP/HKD – 12.3885
GBP/NZD – 1.9327
GBP/SEK – 10.6893
EUR: The single-currency dropped to a two month low against the greenback yesterday as markets turned jittery ahead of Greece’s parliamentary vote on austerity measures. The EUR/USD tumbled to 1.2793 from 1.2828 the previous session as Greek lawmakers vote on further budget cuts and tax hikes to meet targets for its next tranche of bailout money. Weaker than expected Spanish employment data has pressured the pair further overnight and it opens at 1.2780 today morning. We have the services PMI data from across Europe today and traders are avoiding taking long dollar positions ahead of the Congressional and presidential elections from the other side of the pond. The GBP/EUR pair opens at 1.2510 this morning.
USD: Sterling had a disappointing run against its major rivals yesterday and slipped to 1.5956 against the US dollar after services PMI reading came in at 50.6 last month, well below the 52 forecast, posting the slowest growth in nearly two years. Dollar gained across the table as markets turned cautious ahead of US elections and Greece parliamentary vote, spurring demand for safer assets. We have the UK manufacturing and industrial production data due today though reactions can be muted in view of US elections later in the day. There’s no major economic data due today and the GBP/USD opens at 1.2780 today.
Have a great day!
