Good morning and welcome to today’s foreign exchange market commentary on Friday, the 15th of February.
Despite three years of unsatisfactory results, the European Central Bank persists with its original plan, approved three years ago. The EZ had agreed to stabilise debt ratios through fiscal consolidation and balance eurozone govt. budgets by raising taxes and reducing expenses. It had consented to prevent speculative attacks and restore market access with credible long-term policies, backstopped by the ECB and ESM, and remove exit risk with the ECB’s pledge to buy govt. bond if markets became stressed.
Going by the records, excluding Cyprus, all other troubled countries have either implemented structural reforms and fiscal consolidation (or pretending to do it), or in compliance with Troika agreements.
Things look okay on the surface. The bond markets have reacted positively to the ECB president’s pledge and the ESM didn’t make any new loans (except for Greece). Yet the picture is completely delusional.
The ECB’s zero growth policy is pushing the peripheries towards bankruptcy as debt builds up while revenues shrink. The unemployment is already in the danger zone in some of the troubled economies and zonal economic activities are on the decline.
The ECB still glosses over these problems since unemployment is not on its mandate. Human cost and growth are irrelevant for the assessment of success of the original plan.
Still debts continue to rise due to rigid government expenditures and falling revenue, resulting in large and persistent fiscal deficits. To complicate matters, there are never-ending bank re-capitalisations due to private sector and government defaults. Flat GDP growth due to low inflation is aggravated further by fiscal austerity and inadequate domestic demand. Still the ECB remains satisfied with its ZGP policy and continue to ignore the enormous human and economic cost.
The struggling economies in the euro-area are being politically and economically tested for endurance. Greece and Cyprus are already politically fragile and the social safety nets of the peripheral governments are becoming badly frayed. As long as the ECB continues with this vicious experiment, chances of further political failure will only increase.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1606
GBP/US$ – 1.5542
GBP/CHF – 1.4312
GBP/CAN$ – 1.5556
GBP/AUS$ – 1.4981
GBP/ZAR – 13.6650
GBP/JPY – 143.50
GBP/HKD – 12.0245
GBP/NZD – 1.8223
GBP/SEK – 9.8131
EUR: The GDP numbers for Euro-area released yesterday showed the common currency zone slipped deeper into recession than expected in the fourth quarter. Data released by Eurostats, the official statistics agency of the region, revealed a 0.6 percent contraction, well above the consensus estimates put forward by economists. The GBP/EUR pair reacted by rising 100 pips over the day to hit 1.1650 while the EUR/USD pair sank to 1.3315, a three-week low. German GDP shrank 0.6 percent while France contracted by 0.3 percent. Italian economic activity shrank by a whopping 0.9 percent during the period. ECB Vice President Constancio said the central bank is “technically ready” to cut the key lending rate below the current 0.75 percent though bigger EU members like Germany may oppose the move citing inflation. Traders will focus on the G20 meeting due to start in Moscow today with the so-called currency war likely to top the agenda. Euro-area trade balance is the inly release due today and expect some weak numbers on the back of yesterday’s poor GDP readings.
USD: US equity averages had a mixed day yesterday with the Dow Industrials slipping while the S&P 500 and the NASDAQ posted marginal gains. A drop in risk appetite hit the dollar cross after Eurozone GDP numbers reminded of the lurking dangers for the world economy. Decent US unemployment claims boosted demand for dollars, further weakening the cable. The GBP/USD pair traded at 1.5490 compared with 1.5542 late Wednesday. The ICE dollar index, a gauge of the greenback’s strength against a basket of six global currencies, rose to 80.455 from 80.082 the previous day. The US economic data calendar is loaded today with manufacturing data and consumer sentiment readings due for release in the afternoon. Good numbers are expected, which will likely drive the dollar higher.
Have a great weekend!
