Good morning and welcome to today’s foreign exchange market commentary on Friday, the 7th of December.
The Bank of England decided to keep its assets purchase program, popularly known as Quantitative Easing, on hold. The US Fed last week on the contrary, announced further monetary stimulus in 2013. This comes after a third round of QE announced in mid-September by the US central bank. The immediate fallout of this decision will include price increases in commodities, currency depreciation and continued inflow of capital in to hard, commoditised assets least susceptible to the dollar’s decline.
Critics suggest Bernanke’s reasoning is flawed and has negative implications for people. The belief that creating paper currency out of thin air will somehow produce growth is equivalent to thinking money grows on tree.
The basic premise of economics is that credit is derived from the productive activity of individuals and businesses when they exchange the fruits of efforts for currencies. By banking those money notes, they make available capital to those who can use it to grow the economy. The Fed’s activity however, has left the production side of these activities out of the equation.
QE creates money notes out of nothing, critics say, and deposits them in the banking system to create interest bearing assets. However, since the new currencies are created without the creation of any new capital, they fail to circulate capital through the economy. The entire reserve that has accumulated in the banking system’s books since 2008 thus sits idle on the banks balance sheets and is identified as excess.
Empirical data suggests new money leads to direct devaluation of currencies. Mistaking money for wealth and by creating vast quantities of it without the backing of any real economic activity, the Fed has managed to devalue the currency effectively. Gold value of dollar has sunk more than 50 percent since the first round of QE was announced four years ago.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2397
GBP/US$ – 1.6042
GBP/CHF – 1.4992
GBP/CAN$ – 1.5906
GBP/AUS$ – 1.5312
GBP/ZAR – 13.9424
GBP/JPY – 132.16
GBP/HKD – 12.4360
GBP/NZD – 1.9283
GBP/SEK – 10.6777
EUR: The European Central Bank kept interest rates on hold as expected. In the accompanying press conference, ECB President Mario Draghi said that economic weakness is likely to continue in 2013 and members have discussed the prevalent negative interest rates but the central bank would not be taking any action. This negativity drove the 17-member currency half a cent down in the next few hours and the EUR/USD pair came off from 1.3080 to a low of 1.2960. The pair has continued to slide overnight and opens at 1.2930 this morning. Cable gained traction against the single-currency as well with the GBP/EUR pair rising to 1.2392 yesterday from 1.2315. It has eased further to 1.2407 this morning and some consolidation is expected before US non-farm payrolls data is released later in the day.
USD: The Bank of England left interest rates unchanged in its monetary policy announcement yesterday and desisted from expanding its assets purchase target immediately as expected. The GBP/USD pair fell to 1.6035 on the news despite starting the day above 1.6100 yesterday. The cable was dragged lower further by the euro as the ECB cut the region’s growth forecast for 2012 and 2013. ECB President Mario Draghi kept interest rates on hold at 0.75 percent but hinted strongly at further cuts in near future. Also better than expected unemployment data strengthened the US unit further ahead of today’s all important monthly jobs data. The GBP/USD pair has remained weak in overnight trade and opens at 1.6010 today morning.
Have a great weekend!
