German Chancellor rules out Greek exit

German Chancellor rules out Greek exit

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 26th of March.

That nagging fear over a possible euro break up refuses to die down. Nobody seems to be sure about how much information is available in the public domain and the magnitude of the problem. The problem at hand is as much economic as it is political. Just to put matters in perspective, the European Central Bank’s recent €1 trillion liquidity measures under LTRO (Long Term Refinancing Operation) may prove inadequate. Even if you add the combined lending capacities of the two lifeboat funds in the region, the IFSF and the ISM, still there would a shortfall. Italy alone has an outstanding debt of more than €2 trillion. Since there are few murmurs about Rome’s maturing debts, on can only hope technocratic Prime Minister Mario Monti has the situation under control.

Meanwhile German Chancellor ruled out Greece’s exit from the eurozone saying the effect would be catastrophic for the single currency. Noting that existing treaties don’t allow for such exits, she said it would damage the eurozone’s credibility as a single currency union. Indeed if Greece chooses to leave the euro, it will witness steep devaluation of its currency that will trigger a runaway inflation and higher unemployment as corporate profits will slump. Rather a slow and less painful fiscal adjustment is required over the next decade to bring down the country’s perilously high debt levels.

Back home, the British government will spend about £680 billion next year; or a little less than £2billion every day. The recent tax changes are expected to mop up an additional £4.5 billion – the equivalent of a couple of day’s spending. A little more radical measures such as reducing Corporation Tax to 20 percent and increasing personal allowance to £10,000 would have possibly stimulated much stronger growth. This budget may be remembered more for symbolism and rhetoric that anything else.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1968
GBP/US$ – 1.5861
GBP/CHF – 1.4422
GBP/CAN$ – 1.5834
GBP/AUS$ – 1.5183
GBP/ZAR – 12.207
GBP/JPY – 131.12
GBP/HKD – 12.3236
GBP/NZD – 1.9436
GBP/SEK –  10.689

EUR: The single currency advanced against the greenback on Friday as risk sentiments improved. Stronger than expected French business confidence and better Italian retail sales combined with Chinese bank reserve-rate cut rumours triggered the euro’s rise. The market are expected to shift focus to the EZ this week, with the German IFO data expected to set the tone for euro this week. Spanish and Italian bond auctions will also be closely watched later in the week. The single currency opened higher against the Pound today and the GBP/EUR pair sits at 1.1951 now.

USD: Sterling closed higher against the greenback on Friday at 1.5860. The cable had sunk to 1.5821 earlier after new mortgage approvals in UK came in lower-than expected. However, the pair made a smart comeback though there was barely any data to support the rally except the rumors of an impending Chinese reserve requirement rate cut.  There’s not much economic data coming out from the UK this week except the Q4 GDP estimates on Wednesday. However, a slew of economic data are expected on the other side of the pond this week. The GBP/USD pair opens at 1.5844 this morning.

 

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