Good morning and welcome to today’s foreign exchange market commentary on Monday, the 6th of August.
There seems to be no let up to the euro’s problems. Greece is likely to miss its deficit reduction targets by a wide margin, thus becoming ineligible for further assistance from the EU and the IMF. Europeans need to decide whether to let Greece go even though a possible euro-exit may not enhance Athens’ chance of a successful adjustment.
The Greece-exit will come at a price for Europe, but hopefully can be managed. The European Central Bank is likely to flood the region’s banks with another round of LTRO, possibly against below-par collaterals. Or the Securities Market Program will be re-launched to narrow the spread between peripheral and core countries. In short, the region’s central bank will be taken hostage by the dire consequences and forced to extend the life of the single currency.
The imploding currency’s present travails compare to the arguments in the run-up to the currency union. When 11 countries chose to give up their nominal exchange rates (or national currencies), they apparently forgot alternative arrangements need regional adjustments that are critical for the survival of the monetary union; labour markets that can absorb shocks, intra-union fiscal transfers and increased migration within the union.
Real estate bubble in Spain and other countries that widened regional current-account imbalances was misinterpreted and reality struck in fall 2009 when the bubbles burst. Since it has been accepted now that intra-region current account deficits can’t be sustained, adjustments need to be carried out by bringing down the exchange rates, i.e. pushing up domestic prices of tradable goods and services.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2606
GBP/US$ – 1.5604
GBP/CHF – 1.5154
GBP/CAN$ – 1.5618
GBP/AUS$ – 1.4772
GBP/ZAR – 12.7175
GBP/JPY – 122.28
GBP/HKD – 12.1040
GBP/NZD – 1.9068
GBP/SEK – 10.5292
EUR: The single-currency surged against both the USD and the cable over better than expected US jobs data on Friday. The EUR/USD hit a high of 1.2440 overnight despite starting the day at 1.2220 on the back of stop-loss buying by traders. As risk sentiments improved, euro marched ahead of the Pound and the GBP/EUR pair slipped to a low of 1.2590. The common-currency may witness further consolidation as investor sentiments improve in anticipation of further ECB intervention to bring down Spanish and Italian borrowing costs. The tier-1 economic news calendar is light on the ground today. The GBP/EUR pair opens at 1.2615 this morning.
USD: Better than expected US jobs data triggered a global risk rally on Friday, pushing the pound higher at opening this morning. Mario Draghi’s announcement left markets disappointed last week due to lack of clarity though there are rumours Germany will not oppose the ECB re-launching its Securities Market Program to bring down Spanish and Italian borrowing costs. Risk sentiments got further boost after US non-farm payroll data came in at 163,000 in July, beating analysts’ projection of 100,000 by a wide margin. The GBP/USD pair jumped to 1.5540, only to push higher overnight to 1.5660. US equities surged while the greenback lost allure as euro-shorts ran for cover. The economic data front is quiet today on either side of the pond while market will keep an eye for the BoE’s inflation report on Wednesday. The GBP/USD pair opens at 1.5600 this morning.
Have a great day!