Good morning and welcome to today’s foreign exchange market commentary on Monday, the 29nd of October.
ECB President Mario Draghi announced his support for an EU economic and monetary affairs super commissioner proposed by German Finance Minister Wolfgang Schaeuble earlier adding countries must transfer part of their sovereignty to the European level to restore confidence. This is in addition to the single banking supervisor in the European region that the heads of states and governments had committed on June 29. The banking union, set to become operational by January 2013, is expected to break the negative feedback loop between sovereign states and their national banks. European region taxpayers have granted an estimated EUR 4.5 trillion in guarantees and loans to the banks.
The proposed banking union is an unfinished agenda and further work needs to be done. Contrary to the German proposal of supervision for the systematically important banks, all the banks in the region needs to be brought under the regulator’s watch since it’s extremely difficult to define systematically important banks. Failure of banks like Northern Rock, Dexia and Bankia showed small and medium sized banks can cause turbulence in the whole banking system. Also the idea of having two regulators for the same market seems irrational.
Also the authorities are slowly moving to the ECB under the European Council’s watch. National supervisors however will continue to take key decisions even though the roles of national and European supervisors need to be fine-tuned. The ultimate authority however, should rest with the central bank.
The ECB must also be able to maintain its full monetary-policy independence despite the added responsibility. National parliaments should be engaged more as more decision making powers are given to the European Parliament.
Some European countries have touted the ECB’s plan to initiate the banking regulator by January 2013 as too ambitious. However, the recapitalization of banks through the ESM can’t take place unless the single banking regulator comes into effect. However, only banks that have received or requested bailouts will come under the regulators supervision by 2013. It won’t be before July when all banks of systemic importance will be under the supervisor’s watch and only by the start of 2014 all the banks in the region are expected to come under the regulator’s lens.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2444
GBP/US$ – 1.6058
GBP/CHF – 1.5048
GBP/CAN$ – 1.6052
GBP/AUS$ – 1.5526
GBP/ZAR – 13.9431
GBP/JPY – 127.92
GBP/HKD – 12.4481
GBP/NZD – 1.9576
GBP/SEK – 10.7961
EUR: The euro lost ground on Friday after Spanish unemployment rate hit a fresh all-time high of 25 percent in September and ratings agency Standard & Poor’s downgraded a raft of French banks. However, German consumer confidence index came in stronger than expected though it didn’t have any effect on the common currency. Meanwhile ECB President Mario Draghi said he would support plans for a super commissioner that would let the EU intervene in advance for changes in state budgets though the euro reacted little to the news. The EUR/USD opens at 1.2900 this morning. Cable remained range bound against most of its peers on Friday though it eased against the US dollar after Q3 GDP came in better than anticipated. GBP/EUR however continues to break new grounds and opens at 1.2460 this morning.
USD: Cable was fairly range-bound on Friday though it fell below the support level of 1.61 against the greenback after the US economy showed an expansion of 2 percent in the third quarter against expectations of a 1.9 percent rise. A raft of US economic data releases are due this week including the highly anticipated non-farm payroll data. However, we are unlikely to see much activity today as New York remains shut down in anticipation of Hurricane Sandy. The GBP/USD pair opens at 1.6065 this morning.
Have a great day!