Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 9th of October.
The macro-economic ailment:
The so called quantitative-easing 3 announced by the Federal Reserve is unlikely to show much result as the diagnosis has been wrong in the first place. American consumer spending has plunged to the lowest level since the Great Depression. US personal consumption expenses, after adjusting for inflation, rose by 1.5 percent in Q2 and should show similar growth in Q3, a trend witnessed for over 4-1/2 years now. Compared to the 3.6 percent annual average growth in the pre-crisis decade ending 2007, the average real consumer spending growth of 0.7 percent from the first quarter of 2008 to the second quarter of 2012 indeed looks extraordinary.
The credit and property bubbles had driven excessive consumption for a decade. Since the property bubble burst in 2007, US households have been busy building up savings and paying down debts, causing a prolonged weakness in the consumer demand. The balance-sheet repairing exercise has taken its toll on American consumers, much like the Japanese corporate sector of the 1990s that had caused the first of Japan’s lost decades.
The Fed’s treatment of the problem as a cyclical phenomenon and deploying accommodative measures thinking it to be a temporary shortfall in demand is misplaced. The aftershocks from a balance-sheet recession are anything but temporary. In nearly five-years since the bubble burst, personal savings rate has just crawled up to 3.7 percent by Aug 2012, less than half of the 7.4 percent average recorded in the last three decades of the twentieth century. The debt overhang also remains massive, at 113 percent of disposable income, it is well above the average of 75 percent witnessed during 1970-2000. It will be a long-time before the balance-sheet repair process is completed, suggesting this is hardly a cyclical of short-term problem.
The Fed’s approach of recreating a credit and asset driven consumer model is the rerun of the same errors that had pushed the country’s economy to the edge between 2003 and 2006. The assumption that large doses of liquidity will stimulate the credit and asset markets and the subsequent wealth effects will drive ‘animal spirits’ in consumers to spend again , irrespective of balance-sheet strains, is flawed.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2352
GBP/US$ – 1.6039
GBP/CHF – 1.4987
GBP/CAN$ – 1.5652
GBP/AUS$ – 1.5704
GBP/ZAR – 14.2096
GBP/JPY – 125.67
GBP/HKD – 12.4352
GBP/NZD – 1.9527
GBP/SEK – 10.6227
EUR: The single currency had a mixed day yesterday as the Eurozone finance ministers unveiled the EUR 500 billion European Stability Mechanism, the region’s bailout fund, providing some much needed relief. A warning from the IMF that the current crisis is spreading from the peripheries to the cores and subsequent downgrading of global growth forecasts weighed on the euro, but it bounced back slightly to trade at 1.2930 this morning. The GBP/EUR plunged to a low of 1.2350 yesterday and was one of the worst performing currencies ahead of UK’s manufacturing and trade balance data release today. However, the pair has recovered slightly following Draghi’s comments and opens at 1.2395 this morning.
USD: Cable broke the 1.6100 barrier against the dollar yesterday to drop to 1.6025 as markets remained worried over Spain’s delay in seeking a formal bailout from its neighbours. Yesterday being a bank holiday in the US, the focus remained on news from meetings between the EU and the eurozone finance ministers and the trend is expected to continue today morning as ECB President Mario Draghi speaks this morning. German leader Angela Merkel is in Greece today while the Ecofin meeting continues in Luxemburg. The pound has weakened further ahead of the UK Manufacturing Production, Industrial Production and Trade Balance numbers this morning and opens at 1.6010.