Economic rut effect to spill into developing nations

Economic rut effect to spill into developing nations

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 2nd of October.

Europe’s unemployment rate continues to be at an elevated level for the third straight month. As the developed nations struggle to get out of the economic rut related to growth and employment, the effects are now spilling over to developing nations. The policy responses to the factors underlying the crises have been inadequate. For one, de-leveraging the economy and the resulting fall in aggregate demand is still hurting growth. Having sustained demand with high leverage and excessive consumption, repairing public and private balance-sheets will not be easy.

For any advanced economy, the non-tradable part is large and domestic demand makes up most of this sector. Some of the deficit can be compensated by the tradable part, though it would still be inadequate. Government spending can also plug this gap in principle, but mounting debts restrict their capacity though it has been the subject of intense debate across most of the struggling economies. The truth is global growth will be marginal at best in the short and medium term as de-leveraging continues. In the interim, if US gridlock over fiscal cliff continues in 2013 or Europe plunges further, the probability of a major recession will become a bigger reality.

Investment, or the lack of it, is the other reason for today’s problems. Long term growth requires investment by the private sector, the government and individuals. Employment opportunities will diminish as investments slow down. The consumption-led growth witnessed prior to the crisis was deficient on investment, especially on the public sector side.

If investments are revved up to make up for the shortfall, there’ll be an immediate cost; consumption will be deferred. On the other hand if investments are cut as part of the fiscal rebalancing act, medium and longer-term growth will suffer, affecting the younger work force waiting to enter the job market.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2508
GBP/US$ – 1.6148
GBP/CHF – 1.5142
GBP/CAN$ – 1.5861
GBP/AUS$ – 1.5668
GBP/ZAR – 13.4938
GBP/JPY – 126.07
GBP/HKD – 12.5210
GBP/NZD – 1.9432
GBP/SEK – 10.6312

EUR: The single currency has made marginal gains against the greenback over the past 24 hours with the EUR/USD pair opening at 1.2895 this morning after starting at 1.2865 yesterday. The euro had hit a high of 1.2930 after both Spanish and Italian manufacturing PMI readings came in above expectations despite being in the contraction region. Further boost was received after the US ISM manufacturing number hit the highest mark in four months, showing revival in manufacturing activity. The pair is expected to remain range-bound ahead of the ECB’s monetary policy statement on Thursday. The pound has remained fairly steady against the euro over the past 24 hours and opens at 1.2520 today morning.

USD: The greenback has been nearly flat against the cable over the past 24 hours despite coming under pressure after the UK manufacturing PMI reading came in softer than estimated, indicating British industry contracted sharper than initially thought. More bad news followed after data revealed number of new mortgage approvals and total consumer credit fell short of expectations. The pound fell to a low of 1.6125 before finding support and has traded higher this morning in Asia. The GBP/USD pair opens at 1.6150 this morning and is expected to remain quite in the run up to the US Fed policy decision minutes on Thursday and the non-farm payroll data on Friday.

Have a great day!

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