There’s no real budget deficit

There’s no real budget deficit

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 15th of November.

Most European countries, including Greece and Spain have no real fiscal deficits. The same holds true for countries like the US and the UK, which have ratcheted up their debt-GDP ratio. The statistics reveals it all. Government borrowing rates are at an all time low, meaning markets don’t foresee any imminent bankruptcy. And the investors piling up sovereign bonds are not govt. controlled central banks or naïve war widows. Rather hedge funds and sophisticated sovereign wealth funds have channeled huge money into the govt. securities market over the past three years.

That is because investors, especially those beyond the eurozone, know that the indebted nations are nowhere near bankruptcy. US debt is expected to stabilise at 89 percent of GDP between 2014 and 2017, even if the Bush-era tax cuts are extended and spending cuts are halted, reports the IMF. The same holds true for Germany, Britain, France and Italy. Assuming debt levels vary between 85 and 100 percent of GDP, they will still be lower than historical highs. Britain’s national debt was more than 110 percent of GDP in the late 1940s while US’s national debt peaked at similar levels. Still both the countries experienced their strongest growths in the two decades after their debts breached the 100 percent GDP mark.

The fiscal situations in Britain and the US are less worrisome today since more than two thirds of the debts are being held by the central banks. Since the Bank of England and the US Fed are part of their respective governments, the sovereign bonds they own represent the debt the government owes to itself.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2428
GBP/US$ – 1.5848
GBP/CHF – 1.4971
GBP/CAN$ – 1.5885
GBP/AUS$ – 1.5296
GBP/ZAR – 14.0921
GBP/JPY – 128.02
GBP/HKD – 12.2851
GBP/NZD – 1.9516
GBP/SEK – 10.7512

EUR: The single currency strengthened against the greenback yesterday to trade at $1.2739 after European Union Economic and Monetary Affairs Commissioner Olli Rehn said Spain has taken effective steps to cut its budget deficits for 2012 and 2013. European economic data however continues to disappoint with industrial production falling well short of expectations. Euro however came under pressure following Israel’s air strike on Palestine and disagreement between the IMF and EU officials over Greek aid delivery. The cable has softened against euro after BoE’s latest quarterly forecast indicated inflation is likely to remain over the 2 percent target till mid 2014.The GBP/EUR pair opens at 1.2422 this morning.

USD: The US dollar pushed ahead of Sterling yesterday after the Bank of England’s latest inflation report downgraded UK growth forecasts to 1 percent for next year, adding output is likely to remain below pre-crisis levels over the next three years. The UK unit has appreciated by 8 percent over the past 12 months, undermining the country’s competitiveness and exports, the report revealed. Weak growth forecasts triggered a near selloff, pushing the GBP/USD pair lower to 1.5838 from 1.5900. UK unemployment rate fell marginally to 7.8 percent although it failed to affect the cable much. GBP/USD opens at 1.5840 this morning.

Have a great day!

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