Eurozone is running out of time

Eurozone is running out of time

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 12th of October.

Portuguese authorities successfully negotiated with the countries creditors recently. Lisbon stretched its repayment commitment to Oct 2015 for debts falling due in September 2013. The conclusion of the deal on October 3 was hailed as a successful market test for the economy. Ireland also completed similar operations, swapping short-term debts with long-term maturity papers.

The assumptions for such deals are simple; buy time and create a more realistic repayment schedule for private creditors while they slowly drift away from troika bailouts. Growth is expected to return down the line, augmenting repayment capacity. Projections show Ireland and Portugal’s debts are expected to peak in 2013 to 130 percent of GDP, after which they are expected to fall. Needless to say, the projections are based on estimated pace of economic growth. Private creditors are also coming around to accept that repayments are likely to be drawn down and insisting on current repayment terms may have unpleasant consequences.

But growth may not come easily for the region. The IMF has revised Lisbon’s growth forecast downward to -1 percent in 2013 from a “modest growth” forecast in late June. Each downward revision of economic growth results in the postponement of the date on which the debt/GDP ratio was expected to peak.

Beyond 2013, growth depends on comprehensive structural reforms or a strong revival in global demand. Unfortunately, growth has stagnated in Europe and a revival in the near term for global demand seems unlikely.
The Portuguese strategy may not hold good since time eventually runs out. There may be a call to the bondholders later to share the pain.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2394
GBP/US$ – 1.6032
GBP/CHF – 1.4983
GBP/CAN$ – 1.5682
GBP/AUS$ – 1.5585
GBP/ZAR – 13.8331
GBP/JPY – 125.79
GBP/HKD – 12.4323
GBP/NZD – 1.9561
GBP/SEK – 10.7431

EUR: The single currency recovered from its recent lows yesterday as markets hoped the downgrading of Spain to near-junk status would force the Iberian nation to seek to seek a formal bailout to keep borrowing costs under control. Elsewhere in eurozone, jobless rate hit 21.1 percent in Greece after unemployment rate grew for the 35th straight month. We have the monthly volume change in output due from the eurozone today, but news from Madrid can have a bigger impact on the euro’s movement. The International Monetary Fund called for easier deficit reduction targets to restore economic growth though the Germans were quick to shoot down such suggestions. The single-currency may come under further pressure as European equity markets open lower today.

USD: Improved risk sentiments following a larger-than-expected fall in jobless rate pushed the greenback lower, reversing gains posted earlier in the week. The EUR/USD pair bounced back from yesterday’s 1.2820 and currently trades around 1.2975. The cable also remained well bid under the 1.6000 level and the US dollar continues to be sold around the globe. Due to lack of any tier-1 economic data, the pound is expected to remain range-bound. We have the US inflation and consumer sentiment reading due later in the day.

Have a great weekend!

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