Good morning and welcome to today’s foreign exchange market commentary on Monday, the 8th of October.
Critics often suggest the International Monetary Fund sprays funds in Europe. The fund which counts 188 countries as members, on the contrary, has been conservative given Ireland, Portugal and Greece accounts for roughly 10 percent of its total lending capacity of $1 trillion. The current head Christine Lagarde has been more prudent than her predecessor Dominique Strauss-Kahn.
That being said, the toughest test for the fund is yet to come. Spain is widely expected to formally request for a bailout sometime in future. Spanish GDP is bigger than Greece, Portugal and Ireland’s put together. The IMF, which is a junior partner in troika of institutions, the other being the ECB and the EC, will see its coffers dented significantly as Spain gets ready to borrow EUR 207 billion alone next year.
That would require a change in strategy and it’s important that Spain maintains access to markets. Also the IMF shouldn’t commit funds to Spain as the European Stability Mechanism, the region’s EUR 500 billion bailout fund that’s launched today, will be sufficient to meet Madrid’s demands. ESM can buy bonds directly to ease pressure and once Spain agrees to economic reforms, the ECB can wade through in the secondary markets to bring yields down.
True, the fund’s capacity to influence will be diminished in Europe, but it will be better than witnessing its reputation of being an autonomous financial institution that offers independent economic advice getting tarnished.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2388
GBP/US$ – 1.6089
GBP/CHF – 1.5024
GBP/CAN$ – 1.5736
GBP/AUS$ – 1.5823
GBP/ZAR – 14.1106
GBP/JPY – 126.42
GBP/HKD – 12.4771
GBP/NZD – 1.9701
GBP/SEK – 10.6571
EUR: The single currency gained against the greenback on Friday after US jobs data showed a surprise jump in employment numbers and the EUR/USD pair rose to 1.3070 before giving up most of the gains. The uncertainty over extending Greece’s deficit reduction programs continues to weigh on the markets and Athens is bound to default in the coming months if the next tranche of funds are not released soon even though a report by the inspectors from the international lenders are not likely before the end of this month. The GBP/EUR pair has sunk lower overnight and the EUR/USD pair opens at 1.2965 this morning. Euro zone will formally unveil the EUR 500 billion ESM bailout fund today and the first tranche of EUR 40 billion will be paid to Spain to re-capitalise its banks. Greece and Cyprus is also expected to top the discussions of the EU finance ministers that meet at Luxembourg today. However, euro has strengthened against the pound this morning and GBP/EUR opens at 1.2405 this morning.
USD: The US dollar lost ground against most currencies as the all-important jobs number showed marked improvement. The economy added 114,000 jobs in September, pushing the unemployment rate below eight percent for the first time in 43 months. The GBP/USD rallied to a high of 1.6218 as risk sentiments improved, but lost ground soon after the US equity rally faded. The dollar is expected to stay range-bound today as the US celebrates Columbus Day. Markets will observe the EU finance ministers meet that gets underway in Luxembourg today for news-bytes on Spain. After a quiet Asian session, the GBP/USD opens at 1.6080 this morning.
Have a great day!