Good morning and welcome to today’s foreign exchange market commentary on Friday, the 21th of December.
Germany has no doubt been the best performing advanced economy over the past decade. It exports almost as much as China, sans the benefit of cheap labour, and with the handicaps of relatively short working hours and high welfare costs. German exports stand at about $1.6 trillion, a little more than that of the US and nearly twice as much as Japan. The total debt level is relatively low and Berlin adds up big trade surpluses year after year.
But that may shortly change now. Latest data shows Germany’s economy shrank by 2.6 percent in November. The Bundesbank revised its growth projection to 0.4 percent for 2013 from 1 percent six months ago. The German economy benefitted hugely from the emerging markets over the last decade. But as global economic growth slows down, both Europe and emerging economies start to show signs of stagnation. Not only the 40 percent of German exports that go to Europe are likely to stall, the remaining 60 percent that goes to the rest of the world is likely to suffer as well.
Since the German economy doesn’t depend on credit cards like the US, a domestic demand surge is unlikely to replace exports. With debt levels at 82 percent of GDP, the German economy may not be as leveraged as the peripheries in Europe, but there’s little scope for major stimulus from the state.
Also, the European bailout bills will start falling due soon. Much of Greek debt has to be written off sooner or later while Spain and Italy would be following suit. Berlin will either absorb the losses or the banks will witness holes in their balance-sheets, forcing the government to intervene. Either way, the government would be forced to cut spending as debts blow up at a time when the economy is sliding. German bourses may crash when the liabilities show up in 2013.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2308
GBP/US$ – 1.6251
GBP/CHF – 1.4856
GBP/CAN$ – 1.6092
GBP/AUS$ – 1.5561
GBP/ZAR – 13.8793
GBP/JPY – 136.53
GBP/HKD – 12.5920
GBP/NZD – 1.9623
GBP/SEK – 10.6165
EUR: The single-currency remained pretty much range-bound yesterday, appreciating mildly against both the USD and the GBP. However, risk sentiments have soured a little overnight over US fiscal-cliff fears and the EUR/USD has come off Wednesday’s 8-1/2 month high of 1.3308 and is trading at about 1.3195 currently. GBP/EUR traded near a seven-month low after UK retail sales data came in weaker than anticipated, pushing the pair down to 1.2259. Cable has weakened further today morning and the GBP/EUR pair is trading near 1.2249 now.
USD: The US dollar gained ground against most of its peers yesterday after House Speaker John Boehner’s “Plan B” on the so-called fiscal cliff failed to garner enough support, intensifying concerns that a budget-deal may not be reached by the end of the year deadline. Yesterday’s better-than-anticipated existing-home sales and Philly Fed manufacturing data supported the greenback further. Sterling fell to its lowest level in a week after UK consumer confidence for December fell short of expectations. However, despite the recent weakness, the GBP/USD pair has gained 0.5percent for the week. The pair is unlikely to see much movement today unless we see disappointing core durable goods data due today from the other side of Atlantic. The GBP/USD pair opens at 1.6283 today morning.
Have a great weekend!
