Good morning and welcome to today’s foreign exchange market commentary on Monday, the 25th of February.
Economists often espouse the benefits of free trade because want everybody to love it. The reason is not difficult to understand. For economists, free trade is the closest thing to a wonder. The trick is, as long as you make a different good with a different efficiency, you both can gain from the trade by concentrating on your strength. And the gains can be big, similar to a new labour-saving technology as specialisation helps you produce more with less.
But there is a catch, and there are plenty of them. All tricks have them. The free-trade argument falls through when the economy isn’t at full employment. And even if they were, the gains are not equally shared. To put it differently, everybody will pay less for goods and services, but some will earn less, or worse still, lose their job completely. Economists won’t tell you this, unless you happen to be a student of the subject.
The irony is trade almost free already between Europe and the US, with tariffs averaging just 3 to 4 percent. It’s the same thing circulating across the Atlantic under different names. Hence, it’s difficult to see the benefits if tariffs go down, say from 3 percent to 1 percent, with Europe. Tricky issues like agricultural subsidies and anti-dumping rules will never be part of any negotiations, especially the former, since other countries may demand equal treatment. Indeed, a study by German IFO institute reveals reduction in custom duty increases per-capita GDP by only 0.1 to 0.2 percent.
A free-trade agreement is worth pursuing nonetheless, as it encourages other countries to join in, or be left behind. The average US import tariff varies between one and 1.5 percent and there’s almost nothing to gain by reducing them further.
Free trade is an idea that no economist can get too excited about since the magic trick has been performed already.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1446
GBP/US$ – 1.5152
GBP/CHF – 1.4054
GBP/CAN$ – 1.5486
GBP/AUS$ – 1.4724
GBP/ZAR – 13.4212
GBP/JPY – 142.58
GBP/HKD – 11.7416
GBP/NZD – 1.8087
GBP/SEK – 9.6722
EUR: Euro had a mixed day on Friday as early positivity from Germany gave way to negative developments in the later part of the day. A better than expected German business sentiment helped the shared-currency stabilise early in the day as markets hoped this implies Europe’s biggest economy won’t slip into recession. Euro held its ground as the day wore on despite the final iteration of fourth quarter GDP showing the German economy contracted 0.6 percent and the EU economic forecast for 2013 cut to minus 0.3 percent for 2013. However, euro came under selling pressure after the ECB announced commercial banks in the region will only repay EUR 61 billion against an expected EUR 122 billion in three-year LTRO loans, pushing the single currency to a six-week low of $1.3144. Meanwhile Italian elections continue today and markets remain jittery about a possible comeback by former PM Silvio Berlusconi as political uncertainty could unsettle the euro. The GBP/EUR pair is trading around 1.1393 now.
USD: The US Dollar marched ahead against most of its trading peers on Friday as negative news from the UK and Europe dominated the headlines. Late Friday evening, the UK lost its coveted Aaa rating from Moody’s, one of top three credit-rating agencies, knocking sterling down. Though the one-notch downgrade to Aa1 was not unexpected due to the bleak outlook for the nation’s growth and mounting public debt, it still sent shockwaves through the markets causing the pound to drop against all of its major rivals bar the yen. The greenback got further support on speculations that the US Fed will scale back its bond-purchase program. Markets will stay focused on US budget sequester, due to come into effect on Friday. The next 36 hours are crucial as Bernanke testifies before the Senate Banking Committee tomorrow. The GBP/USD opens is trading around 1.5147 now.
Have a great day!
