Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 31th of January.
Economic crises tend to appear suddenly and end before anyone had realised. To put things in perspective, Asian economies had bounced back in little over a year after the exchange-rate fiasco triggered one of the worst financial crises in decades in 1997. A year after Lehman Brother collapsed in 2008, confidence in the US financial system had been restored and the recovery started. By these standards, three years is already a long time; three years ago Greece erupted in the face of EU policymakers, much to the delight of money managers.
Much water has flown under the bridge since then; Ireland, Portugal, Spain and Italy subsequently hit the headlines for the same reasons. Policymakers first lost credibility for being unable to see the crisis coming, and recouped some of it by announcing brave policy measures. Hedge fund managers made obscene amount of money by betting on the euro crisis first; then lost most of it by wagering on the single-currency’s demise. A status-quo has however been maintained since late 2012.
Three bold decisions have changed the market’s perception about the euro-crisis. First, EU policymakers took steps to initiate a banking union in June 2012. This showed their willingness to address the systemic weakness in the currency union. Second, the Outright Monetary Transaction announced in September showed the ECB’s strong commitment to preserve the euro. Third, Angela Merkel’s visit to Athens boosted investor confidence since members of her own coalition had openly supported a Greece exit.
But dangers still lurk despite last year’s positive developments. Economics always precedes politics but lags market developments. Though market sentiments in New York or Hong Kong may have improved, social realities in Southern Europe are unlikely to perk up in the short run. As long as there is no visible improvement in the region, political risks remain. And any flare up in future will only reignite doubts over the euro’s future.
There is also a lack of consensus on the measures needed to bolster the currency union. While the prosperous North views the current crisis as an oversight failure, the South interprets it as a systemic flaw. The North prescribes austerity as a cure while the South believes little political capital is left to pursue further spending cuts.
Finally, though the euro has displayed a strong sense of survival, it has failed to show a common sense of purpose. Most of its recent policy decisions have been taken only when the continuation of the shared currency has been put to risk. Deliberations stopped when market pressures eased.
To stay relevant in an emerging new world order, the continent’s old nations must stay united and help shaping global rules. The challenge for politicians therefore, is to continue to stay relevant as relegation to irrelevance is not an option for rational thinkers.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1670
GBP/US$ – 1.5828
GBP/CHF – 1.4422
GBP/CAN$ – 1.5868
GBP/AUS$ – 1.5218
GBP/ZAR – 14.3361
GBP/JPY – 143.83
GBP/HKD – 12.2665
GBP/NZD – 1.8930
GBP/SEK – 10.0574
EUR: The single currency continued to advance against the greenback yesterday, hitting a high of 1.3567 at one stage, the highest level against the USD since Nov 2011. Risk appetite got a boost after data showed economic sentiment in the eurozone rose for the third straight month. Comments from Austrian central bank governor Ewald Nowotny that the recovery was seeping into real economy also helped the shared currency. The single currency, however, has come under pressure this morning after German retail sales came in weaker than expected. EUR/USD pair is off its overnight high and is trading at 1.3555 as a result. Euro has given up some of its recent gains against the pound as well and the GBP/EUR pair trades at 1.1654.
USD: The US dollar lost ground against major currencies yesterday after the FOMC voted to keep interest rates at record low levels to stop the economy from falling back into recession. The US central bank also decided to keep buying bonds worth $85 billion a month to stimulate growth after a Commerce department report showed US GDP has shrunk by 0.1 percent in the fourth quarter. The GBP/USD pair sold off from 1.5800 to 1.5760, but has made a comeback this morning as the poor numbers were put down to mitigating factors such as the biggest US defence-spending cut in forty years and bad weather. The GBP/USD opens at 1.5820 this morning.
Have a great day!