Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 4th of December.
For supporters of European fiscal and monetary policies, the difference across the Atlantic couldn’t have been starker. Going by the European Commission’s own admissions, American per capita GDP is expected to return to its pre-crisis level next year while it will still be three percent below 2007 levels in Europe.
Similarly, unemployment levels were nearly at par in 2009-2010 but have since improved by four percentage points. Likewise, US inflation is expected to be lower than Europe in 2013. As US exports slowly gather momentum, capital expenditure has recovered more strongly in the US.
Europe however, leads in public finances. While US fiscal deficit remains at over eight percent of GDP, Europe’s aggregate fiscal deficit is expected to be a little more than three percent of GDP.
There are however, competing theories for Europe’s relative depression. While critics say Europe is paying the price for its misguided austerity plans, supporters suggest the US will also face its moment of fiscal reckoning, possibly at the beginning of next year when automatic tax hikes and government spending cuts come into effect. The situation in Europe could have been worse if austerity was delayed, they argue.
The difference however, lies elsewhere. While the US focused on healing the household balance sheets by deleveraging and forced the banks go through severe stress tests, putting fiscal consolidation on hold, Europe, on the contrary, ignored private sector sufferings and concentrated on fiscal sustainability. While Americans restored faith in their banking sector first and pursued a monetary policy geared to flatten the long term yield curve, Europeans were more worried to exit the fiscal stimulus. Banks were said to be in good shape in Europe when they were insolvent. Households were expected to drive the consumption boom when many were deep in debt in Spain and elsewhere.
As a consequence, Europe emerged with far too many zombie banks, struggling households and ravaged companies. Most Southern countries, including France, were ill equipped to face the crisis while German and other Northern countries survived the downturn.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2322
GBP/US$ – 1.6098
GBP/CHF – 1.4902
GBP/CAN$ – 1.6020
GBP/AUS$ – 1.5396
GBP/ZAR – 14.2410
GBP/JPY – 131.90
GBP/HKD – 12.4732
GBP/NZD – 1.9542
GBP/SEK – 10.6424
EUR: The single currency gained traction against the US dollar yesterday, breaching the psychologically important 1.3000 level after European finance ministers exuded confidence that Greece will be successful in buying back its own bonds worth EUR 10 billion to bring down the nation’s debt burden. Europe-wide manufacturing PMI, which was released yesterday, confirmed the sector continues to shrink with November reading coming at 46.2, a marginal improvement over October’s 45.4. However, risk sentiments got some support after Chinese manufacturing PMI showed expansion for the first time in nine months in November. The economic data calendar remains fairly light on the ground today with only Spanish unemployment reading due in morning. The EUR/USD pair opens at 1.3075 this morning while the GBP/EUR trades at 1.2331.
USD: Cable rallied against the US dollar while holding ground against the euro yesterday as manufacturing PMI data for November came in stronger than anticipated. Though British manufacturing is still not expanding, at 49.1, it was the highest since August. The cable surged ahead hitting a high of 1.6115 and can stay above this level if today morning’s construction PMI comes in above expectations. Risk sentiments remain robust despite US ISM reading showing surprise contraction in November. Focus however, will remain over Wednesday’s budget announcement where investors will be scrutinising the government’s growth expectations. Meanwhile, the continued stalemate over US fiscal cliff remains a major risk for global currencies, at least in the short term.
Have a great day!
