Europe-in search of growth

Europe-in search of growth

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 25th of October.

Growth engines in Europe and around the world are in short supply that can take the region out of recession at some point in future, making fiscal consolidation all the more difficult. As private de-leveraging continues to grow, indeed it has a long way to go before it finds a bottom; private domestic demand is expected to remain weak. Government spending is unlikely to fill the gap, leaving net exports or external demands to do the heavy lifting. But as trade takes place mostly between neighbours, the growth is understandably slow.

The single-currency union showed improvement in external trade balance; surplus rose to EUR 46.9 billion in the first eight months of 2012 which compares with a deficit of EUR 26.8 billion during the same period the previous year. Exports surged 9 percent while imports grew by a mere 2 percent. Yet the net swing of less than one percent is too small to offset the domestic headwinds. The single-currency zone should ideally go through major rebalancing with the peripheries exporting much more to the stronger cores.

The rebalancing is taking place, but not to the desired extent. While German imports in the first six months of 2012 grew by 2 percent over the same period last year, its exports also surged, widening the surplus. Around the periphery exports are rising and imports are declining, still Spain and Greece continues to run substantial deficits.

If Germany were booming, then the peripheries could have claimed back most of the competitiveness gap and depended more on exports to cut trade deficits. Unfortunately, Germany is not exactly booming. To make matters worse, the rest of the world economy is not running hot either. China is rebalancing its economy away from capital goods imports that Berlin specialises in while the US is trying to jack up its own exports.

German demand can be boosted by a German stimulus, say tax cuts. However, with headline inflation that’s currently above target, nominal growth is going to suffer, making the recovery more prolonged and painful.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2363
GBP/US$ – 1.6063
GBP/CHF – 1.4961
GBP/CAN$ – 1.5966
GBP/AUS$ – 1.5492
GBP/ZAR – 14.0151
GBP/JPY – 128.71
GBP/HKD – 12.4514
GBP/NZD – 1.961
GBP/SEK – 10.7108

EUR: The single currency eased against its rivals yesterday after German and French PMI numbers came in weaker than anticipated, indicating contraction. Needless to say, manufacturing contraction in two of Europe’s largest economy ended the euro’s home-run against the US dollar with the EUR/USD pair sinking well below the 1.30 level. Risk sentiments weakened further after data revealed October German Ifo business confidence index fell to the lowest level since Feb 2010. Markets were focused on ECB President Mario Draghi’s speech in the German parliament and the central banker revealed the Troika has made no official proposal on extending Greece’s deadline and added he didn’t believe ECB’s policies would fuel inflation. Cable has strengthened against euro ahead of UK’s Q3 GDP number today morning with the GBP/EUR pair hitting a near two-week high.

USD: The greenback weakened against the pound yesterday but held ground against the euro as markets turned jittery in the lead up to the last Federal Reserve policy-setting meeting before the November presidential elections. The Fed however didn’t spring any surprise and continued with its $40 billion a month mortgage-backed security purchase plans. The ICE dollar index, a gauge of the greenback’s strength, extended gains as concerns over further stimulus debasing the currency faded. The dollar however, weakened against Sterling today morning as markets await UK Q3 GDP that is expected to show a return to growth for the UK economy. The GBP/USD opens around 1.6067 this morning.

Have a great day!

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