Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 12th of February.
Many experts believe technological growth has slowed down and thus living standards are set to decelerate. Per capita income in the US and most western countries doubled every 25-30 years in the twentieth century. But the next doubling will probably happen in 100 years, they argue, though economic growth may not necessarily decelerate in future.
It’s important to understand future growth prospects in order to design suitable policies. Human productivity-growth hit a lower trajectory in early 2000 and most people lived a better part of the following decade in a misplaced sense of prosperity and inflated financial bubble. Worse still, many believe the bubbly growth period between 2000 and 2007 are set to return.
Take for example, the IMF’s forecast for world growth. 10 months after Lehman Collapse, the crisis was over for them in April 2010 and world GDP was expected to grow at 4.5 percent till 2015 while inflation was estimated at 2.9 percent. Circa 2012, after numerous revisions, world GDP growth has been revised down to 3.3 percent and inflation is projected to reach four percent, meaning far less real growth than estimated. Higher inflation and lower growth have hit almost all economies and the UK stood out among advanced economies in this regard in 2011 and 2012.
While projections have been off the mark frequently, each deviation was associated with some event; the Tsunami in Japan, the Greek bailout, US downgrade by the S&P, the list is long. However, faith in growth is a misplace policy priority. The core of the present crisis is the absence of growth.
Experts and policymakers wrongly assumed productivity will continue to grow at 1990s level. This resulted in an asset price boom and created an illusion of well-being. Robust international trade brought into its fold those who were not directly involved in the financial bubble. Economies, heavily dependent on trade, got a serious boost as did emerging markets.
When the crisis struck in 2007, the excesses unwound rapidly. Policymakers, still living in pre-crisis growth illusion, simply postponed hard decisions. Hoping that a rebound of growth in the European periphery will not inflate its sovereign debt was the pivot of such expectations. Watering down and delaying the Basel III bank regulations was another basis of misplaced expectations.
It has become evident policymakers’ forecasts can’t be counted upon for dealing with financial excesses. Unfortunately, there is no silver bullet either that will put us on a higher growth trajectory. Painful structural reforms are an option, but the gains may well fall short of expectations. Maybe it’s time to learn to live on less.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1686
GBP/US$ – 1.5645
GBP/CHF – 1.4409
GBP/CAN$ – 1.5752
GBP/AUS$ – 1.5263
GBP/ZAR – 14.0334
GBP/JPY – 147.38
GBP/HKD – 12.1264
GBP/NZD – 1.8726
GBP/SEK – 10.0254
EUR: The shared-currency pushed higher yesterday after the President of the Bundesbank Jens Weidmann said he didn’t think the euro was significantly overvalued and shot down suggestions of any intervention, warning that loose monetary policy will result in inflation in the end. EUR/USD traded in a narrow range though the pair managed to rally to a high of 1.340 before drifting lower. GBP/USD traded at a wider range of 160 pips. No economic data is due today and markets may witness some movement later tonight when Mario Draghi addresses the Spanish parliament. Cable may consolidate and push higher against the euro if UK inflation data meets expectation today. The GBP/EUR starts the day at 1.170.
USD: The pound witnessed volatile trading against the greenback yesterday as speculations over a looming currency war hit the wires. A currency war is a race to the bottom where countries compete to debase the domestic currency in order to boost exports. Cable fell sharply against both the euro and the USD, losing nearly two cents against the single currency. A Barclays business survey that showed UK business confidence slumped to record low in December weakened the cable further. The Japanese yen dropped against the dollar after a US Treasury official Lael Brainard suggested Washington supports Tokyo’s loose monetary policy and the chief of Asian Development Bank, also tipped to take over as the next governor of BoJ, hinted support for accommodative policies. The ICE dollar index, a measure of the US unit’s strength, stood at 80.201 compared with 80.234 Friday. UK house price data showed prices tanked 4 percent, casting a shadow on the recovery of the sector. We have the release of UK CPI data today morning and the inflation report assumes significance ahead of BoE’s report tomorrow. The GBP/USD opens at 1.5650 today morning.
Have a great day!
