Good afternoon and welcome to today’s foreign exchange market commentary on Tuesday, the 15th of May.
As Greece inches towards an eventual EU exit, market participants are worried about the possible knock-on effect. Indeed the rest of Europe has lost its patience over Athens’ broken promises as the Greeks have lost appetite for further austerity. The return to drachma will invariably involve imposition of capital controls and shutting down the banks temporarily to avoid collapse. As euros in Greek banks are converted to cut-price drachmas, savers in other peripheral countries would like to park their cash in some safer country, resulting in massive flight of capital.
The so-called Target2 imbalances – the amount of money the ECB owes to the national central banks or owed by it, are a proxy for capital flight. Germany, Finland, Netherlands and Luxembourg have positive balances while all peripheral state national banks owe money to the ECB with Italy and Spain topping the list, with outstanding liabilities of €279 and €276 billion respectively.
To counter the flight of capital fright, the ECB needs to wade in and announce that it would supply limitless liquidity to the region’s banks. Also it needs to buy unlimited bonds from the secondary markets since it is prohibited to buy them from the primary market. The region’s rescue funds, the EFSF and the ESM can be used as a backstop for national guarantee funds. However, the €740 billion available in both the lifeboat funds may prove woefully inadequate to fight the crisis.
The ECB’s failure to act as the bank of last resort will trigger a chain-reaction of both banking and sovereign defaults, which the euro is unlike to survive.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2526
GBP/US$ – 1.6102
GBP/CHF – 1.5051
GBP/CAN$ – 1.6124
GBP/AUS$ – 1.6103
GBP/ZAR – 13.1352
GBP/JPY – 128.74
GBP/HKD – 12.5096
GBP/NZD – 2.0695
GBP/SEK – 11.312
EUR: Sterling maintained its upward momentum against the single currency, rallying to touch a high of 1.2566, a level not seen since Nov 2008. The euro was battered as Greece failed to find a political solution to the ongoing stalemate, thus facing the real danger of exiting the currency union. Industrial production reading came in softer than anticipated for the 17-member region, stoking fears of a prolonged recession. The common currency lost ground against the greenback also, touching 1.2825 – the least in 4 months. The single currency came under further pressure after Moody’s cut Italian banks’ ratings during late New York trading. The GBP/EUR pair opens at 1.2513 as market remain focused on European developments.
USD: Risk was truly off bounds for investors yesterday with high beta currencies like SEK, BRL retreating the most against the greenback as the political gridlock continued to spook global markets. Cable did manage to post gains to touch 1.6123, but was unable to hold on to the level and the GBP/USD pair closed at about 1.6090. The greenback strengthened further in the US session as Moody’s downgraded 26 Italian banks. The GBP should find some support ahead of tomorrow’s BoE inflation report. The Empire manufacturing, CPI and retails are expected from the other side of Atlantic though risk sentiments may play a key role in the greenback’s movement. The GBP/USD pair opens at 1.6083 this morning.
