Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 16th of October.
The euphoria over the German Constitutional Court’s endorsement of the European Stability Mechanism seems to be fading fast. Spanish and Italian bond yields are moving up despite the ECB assurance of potentially unlimited bond purchases if needed. So, something isn’t working as previously thought.
True, there has been some progress on the issue of institutional architecture across a more unified Europe. The necessity for a banking union has been widely accepted and there is a consensus of deploying more funds with attached policy conditions in addition to the fully functional ESM.
But progress has virtually has stopped over restructuring macroeconomic policies. The current practice of devaluing the currency in the South by imposing austerity has caused a severe price and wage deflation and resulted in a political turmoil.
The downward spiral in Greece and Spain has caused such a rapid fall in output that spending cuts and tax hikes are unable to reduce budget deficits and bring down debt-to-GDP ratios to target levels. The fiscal targets are shrinking faster as more austerity is imposed.
While the South continues to get squeezed, the North, including the non-euro countries, have piled up current account surpluses in excess of $500 billion in the last 12 months. The North continues to stall wage growth and slowdown domestic demand arguing this will reduce their trade surplus and hamper competitiveness. But they miss the main point; surplus countries should contribute equally as deficit countries to regional balancing as the world economy can’t export to the outer space.
It’s unlikely the current reforms in Europe will succeed if policymakers keep pushing ahead with the wrong macroeconomic measures. That may very well bring the euro-project to an end soon.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2385
GBP/US$ – 1.6082
GBP/CHF – 1.4964
GBP/CAN$ – 1.5781
GBP/AUS$ – 1.5642
GBP/ZAR – 14.0932
GBP/JPY – 126.86
GBP/HKD – 12.4631
GBP/NZD – 1.9661
GBP/SEK – 10.6712
EUR: The single currency traded in a fairly tight range against most of the global currencies on Monday. Investor confidence seems to be slowly returning in the euro-area after the EUR 500 billion ESM fund became fully operational. Greece’s 10-year borrowing costs fell to 17.34 percent in the secondary market, the lowest since August 2011 after Germany reiterated its resolve to keep Athens in the common-currency zone. Focus continues to remain on the EU summit due to begin in Brussels on Thursday and any positive rhetoric over Spain will be euro-positive. We have the German ZEW economic sentiment data due today morning as well as the eurozone CPI numbers. The EUR/USD pair opens at 1.30 this morning.
USD: The single currency eased up against its rivals today morning after US retails sales notched up 1.1 percent in September, beating expectations of a 0.8 percent rise yesterday while speculations over a formal bailout request by Spain grew louder. Bank stocks rallied after Citigroup delivered above consensus earnings for the quarter, raising hopes of a better earnings season. The EUR/USD pair is trading around the 1.30 level ahead of a raft of economic releases today including US CPI and industrial production numbers. Sterling continued to trade fairly flat and failed to show much movement despite housing prices rising by 3.5 percent in October. We have the UK CPI due today morning and markets expect inflation to fall closer to BoE target levels. The GBP/USD pair opens around 1.61 this morning.
Have a great day!