Good morning and welcome to today’s foreign exchange market commentary on Friday, the 4th of January.
The latest FOMC minutes created flutter among investors globally as many policy members supported discontinuing the US Fed’s bond-purchase program. Unfortunately, the biggest risks in 2013 are still posed by the US and Europe and any premature withdrawal of monetary stimulus can only delay the recovery.
With President Obama re-elected, the US is expected to muddle through, much like it has over the last four years. The steady recovery of the housing market seems to be the latest trigger for the Fed’s hawkish tone, but with real house prices still 40percent below the earlier peak, a strong recovery in the real-estate market won’t be forthcoming.
Republicans, on the other hand, will ensure Washing carries on with its own version of mild austerity. The public-sector now employs 600,000 fewer individuals while normal pre-crisis level economic expansion would have meant an additional 1.2 million jobs, meaning a total of 2 million jobs deficit in the public sector alone.
In Europe, Spain and Greece will continue to dominate headlines in the foreseeable future. Further fiscal union is no solution and the ECB’s much vaunted OMT is just a temporary fix. If the ECB demands further austerity from Athens, the patient’s condition is expected to worsen further. Similarly, further banking compact is unlikely to stem the flight of capital from the peripheries unless a common deposit-insurance backstop is put in place. Unfortunately, that is unlikely to happen anytime soon due to due to opposition from the wealthy North.
The effect of the ECB’s EUR 1 trillion liquidity measure, the Long Term Refinancing Operation, has been spectacularly short lived as banks piled up sovereign debts to plug balance-sheet holes. Though European leaders realise that the debt crisis in the periphery will only worsen in the absence of growth, they have failed to offer any solution so far. Rather the creditor (The troika of the EC, the ECB and the IMF) imposed austerity measures have created political turmoil in countries like Greece and Spain.
In 2013, the US is likely to muddle through, the way it did in 2012. In Europe, the creation of a fundamentally flawed common-currency had left enough room for asset bubbles, but domestic politics has left little space for policy manoeuvring. Political brinkmanship will be on display from either side of the Atlantic in 2013. Investors will only hope that someone doesn’t go over the brink in the process.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2331
GBP/US$ – 1.6054
GBP/CHF – 1.4919
GBP/CAN$ – 1.5902
GBP/AUS$ – 1.5388
GBP/ZAR – 13.8596
GBP/JPY – 141.41
GBP/HKD – 12.4373
GBP/NZD – 1.9495
GBP/SEK – 10.5098
EUR: Euro has weakened against the dollar over the last 24 hours after the US Federal Reserve’s latest policy meeting minutes showed many members are starting to grow wary of the central bank’s bond purchase program and want the accommodative policies to end sometime this year. The hawkish tone caught the markets unaware and ended the fiscal-cliff deal inspired equity rally rather abruptly. Chances of Spain formally requesting for ECB help brightened yesterday after reports suggested the country’s Social Security Reserve Fund, Madrid’s key source for government borrowing, is running low on cash. However, on a positive note, unemployment numbers for both Spain and Germany came in better than expected. The EUR/USD pair opens at 1.3015 this morning. Euro has remained steady against sterling though and the GBP/EUR pair opens at 1.2331 this morning.
USD: The US dollar continued its upward movement yesterday after the latest minutes from the Fed’s policy meeting suggested the central bank may wind down its assets purchase program sometime this year. An end to monetary stimulus is dollar positive since investors’ risk appetite diminished greatly, pushing up the greenback and US Treasury yields. Before the Fed minutes were released, ADP job data showed US private sector added 215,000 jobs in December, well ahead of the 134,000 projected by most economists. However, the upbeat mood proved fleeting as hawkish Fed minutes sent investors running for cover. Markets also got anxious over the looming showdown between the Democrats and the Republicans on hiking the country’s debt limit beyond the current $16.4 trillion in March and expect the Republicans to force President Obama agree to entitlement cuts in exchange for a deal on the debt-ceiling. We have the all-important US non-farm payroll data due today though market reaction is expected to be muted after the latest developments. We have the UK services PMI due in the morning though the NFP number is what traders are expected to stay focused on. The GBP/USD pair opens lower at 1.6055 this morning.
Have a great weekend!
