Good morning and welcome to today’s foreign exchange market commentary on Monday, the 17th of September.
Following the US Fed’s decision last week to start an open-ended mortgage-backed security buying program to bring down the unemployment rate, there is little doubt that growth is likely to remain anemic in the second half of 2012. Given the country’s political polarization, annual growth rate is unlikely to cross the 1.6 percent witnessed in the January-June period while the Congress fights over medium-term fiscal consolidation, budget and debt ceiling.
As China’s net export flattens, an economic hard-landing looks increasingly likely as the government delays reforms required to increase private consumption and reduce savings. The impending slowdown can only be delayed through credit, monetary and fiscal stimulus. However, as the effect of stimulus fades, the investment bubble deflates, non-performing loans rise and further rolling over of debts of the provincial governments looks no longer possible, a hard-landing looks more likely in 2013. Also given the imminent change in political leadership, reforms are likely to take a backset. Add to this the geo-political stalemate at the global level where a Israel/US joint strike at Iran looks more likely in 2013, spiking oil prices.
Other major emerging economies like Brazil, India, and Russia have also chosen to kick the can down the road as the weakness in western economies has shrunk the space for export-driven growth. Many have embraced a woefully inadequate state capitalism model and have delayed structural reforms, aggravating the economic slowdown further.
Policy dithering in major emerging markets and advanced economies are heading to a brick-wall and it’s up to the policy makers to decide whether to show leadership and unwind the situation or crash head on into the wall.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2363
GBP/US$ – 1.6216
GBP/CHF – 1.5024
GBP/CAN$ – 1.5757
GBP/AUS$ – 1.5412
GBP/ZAR – 13.3867
GBP/JPY – 127.00
GBP/HKD – 12.5741
GBP/NZD – 1.9586
GBP/SEK – 10.6603
EUR: The single currency continued to gain momentum against the greenback on Friday and breached the 1.3000 level to hit a high of 1.3160 late Friday as risk appetite remained robust following the US Fed’s decision to start an open-ended mortgage-backed security purchase on Thursday. Better-than-expected retail sales number and higher-than-anticipated consumer confidence reading boosted sentiments as well, weakening the greenback further. We have the euro-wide services and manufacturing PMI data along with German economic confidence reading due this week. Some consolidation for the euro is expected before the next movement. The GBP/EUR opens at 1.2375 this morning.
USD: Cable strengthened against the dollar on Friday owing in large part, if not entirely to the FOMC decision to provide further stimulus. Risk appetite remained robust despite US month on month inflation rising at a slower pace of 0.1 percent against an estimated 0.2 percent. The UK economic data calendar is light on the ground today and investors would be looking forward to the MPC minutes on Wednesday for hints of further assets purchase by the Bank of England. However, we have the public net borrowing statistics, UK CPI reading and retail sales number due this week along with the BoE inflation letter. The GBP/USD pair opens at 1.6220 this morning.