Good morning and welcome to today’s foreign exchange market commentary on Friday the 18th of November.
Contagion fear continues to haunt Europe driving down the common currency down ever. The call for ECB’s intervention is getting louder with the US and France urging feverishly the independent central bank to become the ‘Lender of last resort’ and turn the cash printing machine on. The debt crisis that started with the peripheral states like Greece, Ireland and Portugal, have now started affecting the core states like Italy, Spain and France.
On its part the ECB has been reluctant to lend directly to the governments since it flouts the Lisbon Treaty and can undermine its independence from political interference. Needless to say that it’s also worried about easy money stoking inflation. Hence it has stuck to its position that the governments need to sort out the problems themselves rather than depending on bail-outs.
However, the ECB has chosen to overlook three important benefits that a fresh quantitative easing will bring. It will ease the near dried-up money markets since there’s barely any liquidity in the system; stave off a looming double-dip recession that looks more real with each passing day, and prevent the real possibility of Spain and Italy being shut out from the bond markets. The suggested solution of turning EFSF into a bank that can borrow from ECB and to lend the region’s governments to keep their borrowing costs under control needs to acted upon, and quickly. This is a viable solution since ECB is forbidden from lending governments directly, but there’s no bar on lending via the EFSF. However, there are no two ways that countries with loose monetary policy like Italy and Greece must enforce strict fiscal disciplines as a pre-condition to their continued EU membership, a long-time legitimate demand made by Germany. As they say, ‘desperate times require desperate measures.’
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1697M
GBP/US$ – 1.5767M
GBP/CHF – 1.4492M
GBP/CAN$ – 1.6248M
GBP/AUS$ – 1.5830M
GBP/ZAR – 12.9680M
GBP/JPY – 121.21M
GBP/HKD – 12.2906M
GBP/NZD – 2.0767M
GBP/SEK – 10.7210M
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EURO – The common currency was spooked yesterday after 10-year Spanish bonds nearly touched the ‘unsustainable’ level of 7 per cent, and Spain had to commit a euro-era high of 6.975 per cent for 10-year notes. The country had managed to borrow at 5.433 per cent on October 20. The EUR/USD opened stronger this morning after the ECB intervened to buy Italian bonds and is hovering around its recent high of 1.3515. There is however, very little movement for the GBP/EUR pair this morning and is trading at the 1.1700 level now.
USD: Yesterday’s stronger than expected UK retail sales came as a pleasant surprise for many. October recorded a growth of 0.6 per cent – the biggest rise since June, against a projected decline of 0.2 per cent. Sterling got good support on the positive news and the GBP/USD pair breached the 1.5700 level, though it missed the 1.5800 level. MPC member Weale’s comment on FT suggesting there’s a case for further QE in February didn’t help cable either. The GBP/USD pair opens at 1.5785 this morning.
Elsewhere, JPY gained against the greenback yesterday. The antipodean currencies pushed higher against the cable yesterday and trades at 1.5800 and 2.0830 level this morning.
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Have a great day!
