Good morning and welcome to today’s foreign exchange market commentary on Friday, the 18th of January.
The third stage for eurozone crisis may arrive in 2013 when continuation of the currency block in its present form becomes unsustainable. The first stage arrived in the spring of 2008 when the crisis shifted from the US and the region’s banks came under pressure, raising interbank tensions.
In the following spring of 2009, investors grew wary about the crisis spreading to the sovereigns as governments started propping up banks. The finances of the sovereigns became weak in the process and governments and domestic lenders became joined at the hip.
Throughout the crisis, a ‘two speed’ Europe was assumed to be the new normal as it was widely believed that the eurozone core will remain strong and will continue to write checks to the peripheries. The German economy continued to chug ahead with its GDP exceeding the pre-crisis levels in early 2011, even bettering the performance of the US.
Despite America’s history of slowly returning to normalcy, something different happened this time. The US overtook the Germans in 2012 and sans the fiscal-cliff and debt-ceiling drama, the US may well be on its way to a sustainable recovery. The sharp contraction of the German economy in the fourth quarter of 2012 now raises the prospects of a technical recession (two successive quarters of contraction).
Germany recovered fast initially because world trade rose rapidly after a steep fall. China’s demand for German cars and machinery triggered the necessary impetus even though its traditional European partners were struggling. China has slowed down since and the peripheral nations are in deep recession. Fiscal austerity requires them to cut imports while the exporting countries curtail their own imports as well, creating a negative feedback loop. This trade multiplier continues to drag each other down.
It’s difficult to say that the second half of 2013 will bring in more prosperity. In April 2010, the IMF had forecast a 1.8 percent growth for Germany in 2013. The growth target was lowered to 0.9 percent in October last year. Germany’s Bundesbank now thinks even the lowered estimates may be too optimistic.
The belief that tomorrow will be better than today is based on the faith that there is a firm line of defense. With the eurozone-core looking increasingly fragile, the safe-net that supports the periphery will soon become severely stressed. Relying on Germany for bailing out the currency bloc has always been politically uncertain. In 2013, that may become economically unfeasible as well.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1930
GBP/US$ – 1.5981
GBP/CHF – 1.4956
GBP/CAN$ – 1.5771
GBP/AUS$ – 1.5188
GBP/ZAR – 14.1214
GBP/JPY – 143.86
GBP/HKD – 12.3851
GBP/NZD – 1.9122
GBP/SEK – 10.3762
EUR: The shared-currency advanced against the US dollar yesterday after US unemployment data and housing start numbers came well over estimates. A better-than-expected Spanish bond auction also boosted risk sentiments, pushing the EUR/USD pair higher at 1.3356. Madrid sold three existing notes bonds worth EUR 4.5 billion yesterday. That being said, US Philly Fed manufacturing index printed softer than estimated, indicating businesses are growing wary about the proposed government spending cuts. Official comments out of the eurozone have been generally positive this week and the today’s good GDP number from China is expected to strengthen the single currency further. Cable has weakened against the euro in the past 24 hours and the GBP/EUR pair opens at 1.1945 this morning.
USD: Sterling lost ground against the greenback in the past 24 hours as concerns over the UK economy affected demand for the GBP. The GBP/USD pair traded to a low of 1.5956 yesterday and continues to trade below the 1.6000 level this morning even as global risk sentiments improved overnight due to the strong Q4 Chinese GDP reading. Traders have been offloading the pound ahead of UK retail sales data today and any weakness will put further pressure on the cable. The GBP/USD pair opens at 1.5982 this morning.
Have a great weekend!
