Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 8th of November.
The euro’s future remains uncertain even as the Greek parliament approves further spending cuts of EUR 13.5 billion. However, the recent developments in the global financial markets and in Germany may boost the single-currency’s future. The ECB remains committed to intervene to bring down borrowing costs for Spain and Italy if these countries stick to agreed economic reforms and request for help formally. German Chancellor Angela Merkel has offered her support to the ECB’s bond buying plan while the German Constitutional Court has approved the country’s participation in the ESM. The international investors have responded by seeking 4.8 percent yield for Italian bonds and 5.5 percent for Spanish 10-year notes.
Italian bond yields have been slipping given the substantial progress made by technocrat Prime Minister Mario Monti. The government’s decision to raise taxes on owner-occupied real-estate will raise revenues without hurting growth. The IMF has projected a budget surplus (cyclically adjusted) of 1 percent in 2013 for Italy. Since Rome will be in recession next year, the actual deficit will still run at 1.8 percent of GDP, adding to national debt. But as the economy gathers steam, the country will run a surplus.
For Spain, the situation is a little worse. The burden of financing should be transferred to Madrid while allowing its semi-autonomous regions to spend. Italy’s success in containing future deficits through tough measures without increasing current austerity should convince Spain to follow suit.
As debt/GDP ratios start to fall, borrowing costs will automatically come down, reducing chances of an ECB intervention. As Italy and Spain gets out of the woods, Germany will have more room to decide on Greece and Portugal. At 7.5 percent and 5 percent of GDP, respectively, the debts of Greece and Portugal are too high for comfort. Germany may decide later if it’s worthwhile to keep funding these small economies and let them return to national currencies.
France, Spain and Italy can benefit from a weaker euro, though they will not be any better off against Germany. An 20-25 percent devaluation will bring the euro at par with the dollar and improve their competitiveness against non-eurozone countries. German economy will also get the boost as the euro weakens further. If the euro fails to soften up, the ECB’s next challenge will be to talk it down.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2512
GBP/US$ – 1.5981
GBP/CHF – 1.5096
GBP/CAN$ – 1.5922
GBP/AUS$ – 1.5342
GBP/ZAR – 13.8105
GBP/JPY – 127.70
GBP/HKD – 12.3871
GBP/NZD – 1.9562
GBP/SEK – 10.6825
EUR: The single-currency continued to weaken yesterday after ECB President Mario Draghi said the economic crisis has started to impact Germany after German industrial productions fell well short of expectations. More bad news followed soon after the European Commission downgraded growth projection for the currency union to a paltry 0.1 percent in 2013 from an earlier May estimate of 1 percent. Both the events were good enough to spook investors, causing a sell-off that pushed the EUR/USD pair to a low of 1.2740. The Greek parliament however, managed to clear further spending cuts of EUR 13.5 billion yesterday, paving the way for the next tranche of aid money for the Hellenic nation. We have the ECB’s interest rate and monetary policy announcement due today, as well as Draghi’s accompanying press conference. The euro has weakened against the cable over the past 24 hours and the GBP/EUR pair opens at 1.2515 this morning.
USD: President Obama’s reelection triggered a risk rally that saw the greenback easing against its major peers yesterday in early trade. The US dollar however, failed to sustain its momentum and the GBP/USD pair fell back below the 1.6000 level as investors weighed the impact of Obama’s return on the so-called fiscal cliff and the uncertainty surrounding Greece’s vote on austerity measures. We have the Bank of England monetary policy announcement due today along with the UK trade balance figure, while the weekly unemployment-benefit claims number and the trade balance for October is due from the other side of the pond. The GBP/USD pair opens at 1.5985 this morning.
Have a great day!
