Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 6th of December.
Europe has witnessed relative calm since ECB President Mario Draghi announced plans to go ahead with its outright monetary transaction plan that enables the to buy troubled bonds in the secondary market. However, Europe’s problems are still very much alive.
Though Spanish and Italian bonds yields have come down, they will only remain there as long as investors believe Italy and Spain will eventually be bailed out by the OMT. However, if any doubt creeps in over the efficacy of the OMT, yields of both countries will surge, effectively reversing the expectations game.
One of the lingering doubts has been operational requirements of the OMT. To come into effect, all European governments must approve it. Though the degree of control varies across Europe, in Germany approval means consent of the Bundestag. Though the German parliament is unlikely to oppose any OMT measure, a delay in approval can certainly wreck the region’s banks. By the time the German parliament approves, a run on Spanish and Italian banks may be complete.
To preempt any delay in approval, Italy and Spain must make their requests well in advance. Identifying and addressing problems before the doom is much easier than working under the threat of a pending sovereign default. Also requests for ECB assistance will not only bring down sovereign borrowing costs, it will also lower the cost of capital for the local firms, giving must needed boost to the region’s economies.
The obvious question is then, why are the governments dragging their feet if OMT is so beneficial. One possible answer could be the fear of being seen as weak. A similar situation arose in the 1930s when European governments delayed breaking away from the gold standard for the fear of being seen as weak.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2320
GBP/US$ – 1.6082
GBP/CHF – 1.4901
GBP/CAN$ – 1.5952
GBP/AUS$ – 1.5374
GBP/ZAR – 14.1182
GBP/JPY – 132.56
GBP/HKD – 12.4641
GBP/NZD – 1.9408
GBP/SEK – 10.6246
EUR: The common currency had a mixed day yesterday after a batch of unimpressive data from Europe weakened investor sentiments. Spanish bond auctions received weak response while European retail sales reading were particularly poor. Greece’s downgrade to selective default and weak euro-wide services PMI data didn’t help the single currency’s case either. The European unit made some recovery later as Eurozone finance ministers expressed optimism over the EUR 10 billion Greek bond buy-back program, a crucial element for the country’s overall recovery plan. We have the ECB interest rate decision today though no rate change is expected whilst markets may react to the press conference held afterwards. The GBP/EUR pair opens at 1.2324 this morning.
USD: Sterling had a fairly quiet day against the US dollar yesterday with the GBP/USD pair hovering around the 1.6100 mark. The greenback however, strengthened against the euro, ending the single currency’s six day winning streak after Spanish bond auctions failed to stir up much investor interest leading to speculations that Europe’s fourth largest economy will be forced to seek bailout soon. On the other hand, ADP private sector employment numbers came in weaker than expected while US non-manufacturing PMI reading printed slightly better than expected. However, focus continues to remain on the so-called fiscal cliff in the US and the political stalemate over tax hikes for the country’s top earners. The US unit may strengthen further in the coming days over heightened uncertainty if Republicans refuse to cede ground to the Democrats. We have the US unemployment numbers due today and focus will then shift toward tomorrow’s non-farm payroll data. The GBP/USD pair opens at 1.6075 this morning.
Have a great day!
