Spanish 10-year bond yields surged past the seven percent level

Spanish 10-year bond yields surged past the seven percent level

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 13th of August.

The European Union is witnessing a long-term unemployment crisis today not seen since the World War II. However, a significant portion of the unemployed has been out of job for six months or more and is far higher than the post-World War recession.

The long-term unemployment is leaving a damaging impact on those who are living with it. A series of studies conducted after the 1930’s Great Depression showed extended periods of joblessness caused skill deterioration among workers, making it difficult for them to acquire new jobs or skills, apart from the various physical and psychological problems due to social isolation. For the society, there is a real risk of losing the productive capacity of a substantial proportion of population.

A less known fact however, has been how these problems were mitigated successfully by the US in the ‘30s. The US firms, rather than laying people off, resorted to reduced work hours. Between 1929 and 1932, the average work hours in mining and manufacturing dropped to 35 hours per week from 45 hours. Reducing the work hours by 20 percent, employers ensured millions of workers stayed on the job, albeit on a lower income. They had hopes for advancement in future. Later estimates suggested two million workers stayed on job due to ‘work-sharing.’

Since unemployment benefits started thereafter has made work-sharing less attractive, it can nonetheless be restructured to meet today’s realities.  The US has in fact already initiated something on the similar lines. The Short-Time Compensation has been adopted by 24 states that pro-rates unemployment benefits to working hours once the employer submits an approved plan. Germany in fact has gone a step further where the federal govt. compensates if earnings fall by more than 10 percent. It’s time Southern Europe followed suit.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2748
GBP/US$ – 1.5658
GBP/CHF – 1.5312
GBP/CAN$ – 1.5522
GBP/AUS$ – 1.4845
GBP/ZAR – 12.6854
GBP/JPY – 122.65
GBP/HKD – 12.1481
GBP/NZD – 1.9306
GBP/SEK –  10.4549

EUR: The single-currency has been trading slightly lower than the 1.2300 level against the greenback for the last few sessions due to heightened uncertainty over EU. Spanish 10-year bond yields surged past the seven percent level on Friday, adding 20 basis points for the week and reflecting growing investor unease over the ongoing euro drama. The single currency however, got some support this morning over rumours of a reported meeting between Italian Prime Minister Mario Monti and German Chancellor Angela Merkel on Friday. A small EUR/USD short-squeeze was also witnessed in Asia this morning, pushing the pair up to 1.2285 this morning. The cable meanwhile continues to strengthen against the single currency over sustained selling of EUR by traders. The GBP/EUR pair opens at 1.2750 this morning.

USD: The greenback rallied against the Pound Sterling on Friday as risk appetite diminished and the GBP/USD pair hovered around the 1.5600 level. Friday UK PPI numbers also came in as expected, failing to cheer markets. Due to lack of any significant data from the US on Friday, trading remained muted. However, overnight Japanese Q2 GDP data coming at 0.3 percent against the expected 0.6 percent has soured sentiments though the GBP/USD pair has managed to grind higher in the morning to open at 1.5660.  The economic data calendar is light on either side of the Atlantic today and trading is expected to remain range-bound.

Have a great day!

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