Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 17th of July.
How long will the euro’s latest reprieve last?
The euro received a last minute amnesty in the fifth round of meeting in Brussels late last month. Markets celebrated, like they did on the previous four occasions without realizing that the fundamental problems remain unresolved.
But there were meaningful developments. The leaders understood that the bootstrap operations by which they lend the sovereigns to save the banks and then to the banks to save the sovereigns are not working. They also realised that giving seniority to new lenders that provide bailout funds over existing creditors worsens the situation further since private lenders will seek still higher interest rates.
It’s troubling to see that something so obvious took so long to recognise. Also it was agreed more than a year ago that austerity minus growth won’t help Greece. Yet no decision was taken on that front. What was proposed instead was a recapitalization of the European Investment Bank which is part of a growth package of EUR 150 billion. By some accounts, the new money that will go into the system, that also not immediately, is a tiny fraction of the amount. A classic case of misdiagnosed remedies that proved too little, too late.
The hope of markets will reward austerity is misplaced. The proposed Eurobonds, that Germany so vehemently opposes, could stabilise interest rates and would help countries with budgetary constraints free up more money that could be used for growth driving investments.
Germany is worried that in the absence of budget and bank supervision, it would have to continue underwriting its neighbour’s profligacy, missing the point that Spain, Ireland and many others had budget surpluses before the 2008 crisis. Deficits were caused by the downturn, not the other way round.
Europe’s short-term approach won’t work for long. It’s not just the peripheries that have lost confidence; the survival of the single currency is under cloud now.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2732
GBP/US$ – 1.5642
GBP/CHF – 1.5303
GBP/CAN$ – 1.5872
GBP/AUS$ – 1.5201
GBP/ZAR – 12.8071
GBP/JPY – 123.56
GBP/HKD – 12.1432
GBP/NZD – 1.9588
GBP/SEK – 10.9981
EUR: The single currency continued to slide against cable yesterday, hitting a 3-1/2 year low as investors sought refuge in the relative safety of UK assets. The GBP/EUR pair hit 1.2769 in intraday trading as the AAA-rated UK 10-year gilt yields dropped to a record low level on the day. The euro however managed to gain traction against the greenback as investors build up short positions ahead of Fed Chairman Bernanke’s half-yearly testimony before the Congress starting today on hopes for hints of further assets purchase as retail sales slumped for the third straight month in June. The German ZEW data is due today though focus will remain on Bernanke’s testimony for further QE3. This may well push the EUR/USD upwards today, but the GBP/EUR is likely to grind higher today.
USD: The dollar weakened on Monday as US retail sales came in softer than anticipated for the third consecutive month, a feat not achieved since 2008. The greenback predictably fell on speculations that the Fed may soon embark on quantitative easing 3 to halt the economy from sliding further. The pound rallied to a high of 1.5654 despite the IMF revising UK growth forecasts downwards. We have the June inflation data today though it’s unlikely to have much of an impact on cable’s movement while developments on the other side of the pond will be closely watched. The GBP/USD opens this morning at 1.5645 this morning.
