Exchange Rates and Market Commentary [05/12/2011]

Exchange Rates and Market Commentary [05/12/2011]

Good morning and welcome to today’s foreign exchange market commentary on Monday the 5th of December.

A solution to the European credit crisis is finally starting to take shape. As talks about possible solutions do the rounds for the n-th time, don’t be surprised if the hullabaloo ends in nothing. We have seen this for the umpteenth time in the last twelve months, we may see it again. The reason for the market’s new found hope is not totally misplaced though. Apparently German Chancellor Angela Merkel has mellowed down and the European Central Bank has softened its stand, as if on a cue from her. The ECB is likely to cut rates again and infuse some liquidity in the region’s troubled banking system; they may also accelerate government debt purchases in the region. Instead of printing money, the ECB may borrow from the stronger economies of the eurozone and lend it to the International Monetary Fund, which in-turn will lend it to Italy and Spain.

There is however, a small hitch. Ms Merkel and the ECB want to implement tougher fiscal disciplines through a treaty for the region’s erring economies. The European Commission in Brussels should have the powers to override national budgets and the European Court of Justice should have the authority to penalise governments that fail to manage budget deficits. Not that the talk of ‘more Europe’ by Ms Merkel is wrong. Failure by successive regimes to implement tighter fiscal policies – as practiced by Germany; has culminated in the present crisis.

But the problem will be the apparent loss of sovereignty, a staple agenda for the region’s right wing politicians. Even French President Nicholas Sarkozy – who has been backing Merkel all along, found the new treaty difficult to stomach. The opposition socialists, who look likely to replace Sarkozy in May elections, have already dubbed the plan as ‘Austerity Treaty.’

Merkel’s idea, though not a bad idea, would have been better served if she insisted on disciplining through markets, rather than rules. Not that the struggling economies will not sign the treaty or torpedo Berlin’s plan. The fear-of-failure of the euro is so high among the countries, that pretty much all political parties are expected to fall in line when the moment comes. Nonetheless, marriages based on fear may not be sustainable in the long run.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1632
GBP/US$ – 1.5651
GBP/CHF – 1.4396
GBP/CAN$ – 1.5907
GBP/AUS$ – 1.5326
GBP/ZAR – 12.5180
GBP/JPY – 121.95
GBP/HKD – 12.1621
GBP/NZD – 2.0028
GBP/SEK – 10.5348

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EURO: The single currency lost ground against the greenback on Friday, despite gaining earlier in the day. The EUR/USD pair witnessed a selloff in intraday trading to touch a low of 1.3363 on stronger than expected US employment data. The 17-nation currency however, remained strong against the Sterling and was trading at 1.1610 on Friday. The market’s focus remain on the EU leaders’ meeting this week while a fair amount of economic data is released today. The single currency opens slightly stronger against the cable today morning at 1.1636 as news of the Italian government approving further austerity measures totaling €30 billion over the next three years hit the market.

USD: The USD gained against most of the leading currencies after unemployment rate dropped to 8.6 per cent despite non-farm payrolls dipping slightly. The cable lost ground against the greenback after November construction PMI data came in higher than market expectations, but declined over October reading. The GBP/USD pair opens at 1.5650 this morning.

Elsewhere, the Australian dollar dropped against the greenback over the country’s central bank’s rate-cut move.

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Have a great day!

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