Good morning and welcome to today’s foreign exchange market commentary on Monday, the 20th of August.
Whither euro?
As markets prepare for an inevitable Greek exit, the question of whether the single currency will survive comes to the forefront again, despite Draghi’s much vaunted public pledge. However, delaying the unavoidable may complicate the matters further. Either way, the costs are enormous.
Europe’s paymaster Germany realizes the adjustment required through internal devaluation, austerity for debt sustainability and restoration of competitiveness and growth rather than debt restructuring and subsequent exit for Europe’s peripheries will run into trillions of euros (Spain’s external debt is more than $750 billion while Italy’s exceed $2.5 trillion). As private investors increasingly shun the EU, refinancing through other means become difficult. Massive official funding will be required over a period before the region’s credibility is restored even as capital flights continue unabated.
European fiscal authorities like the Emergency Financial Stability Facility (EFSF) and the International Monetary Fund were providing official finance until now. However, The ECB has taken over the mantle and official financing is increasingly being sourced from Europe’s central bank, first through bond purchases, and later through liquidity measures such as LTROs. With Berlin politically hamstrung to provide further money to the EFSF, the ECB may soon launch another round of bond purchase program through the Securities market Program. Some form of political integration with banking and fiscal unions may emerge subsequently.
But is the situation sustainable? The hurdles are too many. As recessions become deeper and economic divergence gets wider, the banking and financial systems will become more fragmented and hostile while debt burdens on already indebted nations become unbearable. Combine this with austerity fatigue in the peripheries and bailout fatigue in the cores, and the recipe for disaster is ready. The formula chosen by the ECB and Germany – flooding the peripheries with liquidity in the short-term and buy more time before the inevitable happens, may eventually destroy the central banks of the core.
No doubt a breakup now will be extremely costly. But delaying it further may jeopardise the survival of the single market and the EU itself as weaker economies will resort to massive protectionist measures to adjust. Only time will tell if the current delaying tactics were the wisest move.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2705
GBP/US$ – 1.5696
GBP/CHF – 1.5267
GBP/CAN$ – 1.5531
GBP/AUS$ – 1.5044
GBP/ZAR – 13.0422
GBP/JPY – 124.84
GBP/HKD – 12.1823
EUR: The euro gained traction on Friday following German Chancellor Angela Merkel’s assertion that ECB President Mario Draghi’s pledge to preserve the single currency was consistent with EU’s official view. The GBP/EUR pair dropped to an intraday low of 1.2713 while the UE/JPY pair surged to a six-week high on hopes the European Central Bank will intervene to bring down lofty Spanish and Italian borrowing costs. The single-currency’s strength was however, less pronounced against the greenback as the dollar gained over some better-than-expected domestic economic data. There’s not much economic data due from Europe and usual official statements are likely to influence euro’s movement. GBP/EUR opens at 1.2715 this morning.
USD: Cable remained range-bound against the USD on a fairly quiet day on Friday. The economic data calendar was light in the UK while better-than-estimated building permit and consumer data gave the greenback some early push. The UK data calendar remains light for the week, but analysts will look forward to the revised Q2 UK GDP estimate due Friday after the disappointing -0.7 percent initial reading we saw in July end. On the other side of the pond, investors will wait for the minutes of the Fed’s last FOMC meeting in the hope of gaining some insight ahead of the central bank’s September meeting. As Europe enjoys its summer vacation, GBP/USD is unlikely to see much action today.
Have a great day!
