Good morning and welcome to today’s foreign exchange market commentary on Monday, the 19th of November.
Last week’s headline grabbing numbers that announced the eurozone has slipped back into a recession missed a key point; the growth rate of the currency-bloc’s four largest economies is converging. Spain and Italy, the relatively weaker siblings of Germany and France, has finally started to catch up.
Since the bloc doesn’t represent a true fiscal union, the convergence eases one of the biggest risks posed by the fundamental flaw of the eurozone; it is only as strong as the weakest of its most powerful member.
As a result of the EZ’s decline by 0.1 percent in the July-September quarter, the union’s GDP is now 0.6 percent smaller than it was a year ago. However, the slide was less steep and pronounced than the second quarter when outputs fell by 0.2 percent. Italy, the weakest among the union’s four leading economies, contracted by 0.2 percent, a significant improvement over the 0.7 percent decline for the April-to-June quarter. Spain’s contraction also eased to 0.3 percent from 0.7 percent for the quarter, the slowest in a year. France also expanded for the first time since the fall of 2011, catching its many critics off-guard.
The so-called core nations, on the contrary, reversed their earlier growth trend. Germany’s GDP fell by 0.1 percent to 0.2 percent while the Netherlands and Austria shrank for the first time after witnessing consistent growth.
One of the biggest fears of investors has been the rising borrowing costs for large economies such as Spain or Italy that could potentially push them into terminal decline. Last week’s numbers indicate investors can breathe easy for now. A Credit Suisse report suggests Italian economy would stop contracting in 2013.
Given the uneven nature of the economic union, distribution of output is more important than the total output. Mario Draghi’s brave efforts to strengthen the emergency response department of the ECB in the absence of an effective fiscal union should be commended for bringing down Italian and Spanish borrowing costs. More transparency however, is required over the fire-fighting mechanism outlined by Draghi. Last week’s numbers assume significance in that context.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2452
GBP/US$ – 1.5896
GBP/CHF – 1.5006
GBP/CAN$ – 1.5889
GBP/AUS$ – 1.5326
GBP/ZAR – 14.0321
GBP/JPY – 129.16
GBP/HKD – 12.3188
GBP/NZD – 1.9514
GBP/SEK – 10.7432
EUR: The euro struggled on Friday dipping just under the 1.2700 level on concerns over Greece and Spain. The region’s finance ministers are meeting on Tuesday to discuss how to fund the Hellenic nation’s recent debt extension as well as restructuring the outstanding debt that would help release the EUR 31.5 billion in bailout money. Risk was sold Friday as US industrial production data reading came in weaker than anticipated. We have manufacturing data due from France and Spain due today and expect some volatility on weak reading. GBP/EUR has held its ground since Friday and the GBP/EUR pair opens at 1.2469.
USD: The greenback got some boost by safe haven flows on Friday as risk too a backseat after US industrial production printed lower at -0.4 percent vs. forecasts for 0.2 percent. The GBP/USD pair fell close to the 1.5800 level, but has fought back 1.5900 this morning after media reports suggested Democrats and republicans are inching closer toward a compromise to avoid the so-called fiscal cliff. This week’s main releases include unemployment benefits, building permits, existing home sales and the Fed Chairman’s speech while UK MPC meeting minutes will be the main attraction on this side of the pond. The GBP/USD pair opens at 1.5910 this morning.
Have a great weekend!