Good morning and welcome to today’s foreign exchange market commentary on Friday, the 31th of August.
Media reports about Bundesbank President Jens Weidmann threatening to resign over the ECB’s new bond buying plan brings the focus back on Europe’s divided house and the implementation risks involved. Europe never had problems with the bigger picture, however, when it came to putting ideas into practice, the leaders repeatedly squandered the opportunities. This tension is again playing out ahead of the next policy meeting on Sep 6. European leaders have now agreed upon the shape of tomorrow’s Europe; more economic and monetary union backed by a banking union, a fiscal union that will be finally complemented by a political union.
A banking union would ensure a common deposit-insurance scheme across Europe and a single regulator with powers to shut down insolvent banks. It will also enable EU’s rescue funds to directly inject liquidity into undercapitalized banks. A fiscal union would possibly give birth to a European Treasury with authority to veto national budgets to reign in profligacy. It would also mean some of the debts will be mutualized where individual member debts will become joint obligations. The European Commission/European Treasury will then decide how many additional bonds to issue and on whose behalf.
The political union, the final cog in the wheel, will transfer national decision making to the European parliament, which will then approve fiscal, monetary and banking union structures. Those responsible for the EU’s daily operations can be dismissed for falling short of their duties.
The problem is lack of consensus even though visions galore. One of the camps argues Europe must implement greater union policies immediately and can build institutions over time to support these policies. The other camp thinks advancing without creating new institutions will be reckless. Giving supervisory power to the ECB without making it accountable to the European Parliament will be undemocratic and may fuel backlash from the members.
The possible way out is accelerating the institution building process since not moving forward may actually speed up the euro’s demise. For one, disaster doesn’t wait for an appropriate time.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2612
GBP/US$ – 1.5781
GBP/CHF – 1.5152
GBP/CAN$ – 1.5651
GBP/AUS$ – 1.5312
GBP/ZAR – 13.3641
GBP/JPY – 123.78
GBP/HKD – 12.2434
GBP/NZD – 1.9737
GBP/SEK – 10.5436
EUR: The euro started off strong against the greenback and the cable on Thursday after Italian bond auction went off successfully with 10-year borrowing costs for Europe’s fourth largest economy coming down further. The rally however, proved fleeting as concerns over the EZ resurfaced following reports that Spanish Prime Minister Mariano Rajoy has deferred the decision to seek bailout funds from EU to check the aid conditions first, indicating differences within the members. Markets will stay focused to Bernanke’s speech at Jackson Hole for indications of more stimulus in the next FOMC meeting and the GBP/EUR is expected to be solely driven by the movement in the EUR/USD pair. Lack of any specifics from Bernanke may hit the EUR/USD pair quite hard. The GBP/USD pair opens at 1.2618 this morning.
USD: The cable surged to 1.5873 against the greenback in early afternoon trade yesterday only to fall back below the 1.5800 handle as the dollar remained well bid and finished the day just above its lows at 1.5785. The EUR/USD pair witnessed a sharp sell-off after Slovak Prime Minister Robert Fico said there’s a 50:50 chance of the common currency breaking up in a televised news conference, driving the cable lower. The Economic Policy Symposium in Jackson Hole will remain in focus today with investors expecting some hints for further central bank support from the chairman’s speech. Whilst it is likely that the tone will be dovish, it remains to be seen if specific comments about further assets purchase are made. The GBP/USD pair opens at 1.5790 this morning.
Have a great weekend!