Poll Shows 75 percent of Greeks wish to stay in Eurozone

Poll Shows 75 percent of Greeks wish to stay in Eurozone

Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 16th of May.

Though speculation of an imminent Greek exit has flooded the markets over the past 24-hour, there are possibilities that the current turmoil drags on for months. The present political vacuum has effectively ensured that no political party, even after June’s reelection, will go ahead with further budget cuts. That would ensure no more bailout funds, leading to widespread defaults and eventual exit from the economic zone.

However, this is where the conundrum begins. A recent opinion poll shows 75 percent of Greeks wish to stay in the eurozone. Greece will most likely need more funds before June elections that will secure a mandate for future bailout money. Some believe Athens may issue IOUs to meet service bills and salaries for a fixed period of time, though whether the ECB will allow the Greek Central bank to accept such IOUs remains debatable.

Nonetheless, such IOUs will be viewed as proxy drachmas by the market immediately, driving down the exchange rates against the euro, pushing inflation through the roof. Some argue the proxy drachma could continue for months depending upon how severe the shock is.

The flight of capital and depositors’ concern will have a domino effect to the other peripheral states causing alarm that may force European policymakers to start another bank liquidity-injection program or an open ended bond purchase program through the ECB.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2570
GBP/US$ – 1.5964
GBP/CHF – 1.5101
GBP/CAN$ – 1.6148
GBP/AUS$ – 1.6132
GBP/ZAR – 13.345
GBP/JPY – 128.29
GBP/HKD – 12.3991
GBP/NZD – 2.0851
GBP/SEK – 11.509

EUR: The single currency sunk to a new 3-1/2 year low against the cable and a near 4-month low against the greenback after the Greek negotiations failed to produce any results, making re-election in June almost certain. Spanish borrowing costs soared with yield on 10-year notes hitting a six-month high of 6.36 percent as markets considered Greece re-election as a referendum on euro. The two-speed economic theory in the EU came out in the open yesterday with German GDP growing by 0.5 percent in Q1, 2012 against Greece’s -6.2 percent. Sterling maintained its upward momentum against the single currency yesterday with the GBP/EUR pair touching a new multi-year high of 1.2577. The GBP/EUR opens at 1.2541 this morning.

USD: The greenback continued to outperform its global peers yesterday as demand for safe-haven assets spiked. The dollar index, a gauge of the greenback’s strength against a basket of leading currencies, rose for the twelfth consecutive day. The pound came under further pressure after UK March Trade Balance data came in weaker than estimated. The free-falling euro had its effect on the pound with the GBP/USD pair ending just below the 1.6000 lever. The dollar found support after the Empire State Manufacturing Index rebounded strongly, wiping out nearly all the losses from the previous month. The FOMC minutes are due from the other side of the pond while BoE will publish its quarterly inflation report today. The cable may weaken further if UK unemployment rate fails to cheer. The GBP/USD pair opens at 1.5967 this morning.

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