By Sayan Guha.
Good morning and welcome to today’s foreign exchange market commentary on Friday, the 6th of July.
Reading the fine prints of last week’s summit!
Following last Friday’s “successful” EU summit, global markets were euphoric. However, most details are sketchy, if not absolutely vague. The leaders agreed to a single banking regulator across the Eurozone. The previously agreed €100 billion in capital injection into Spanish banks will now be carried out directly by the EFSF and its successor the ESM, rather than as loans. To secure the interest of external lenders, loans made to banks will not be superior to outsider creditors. However, the implementation risks are profound.
For example, the European Council will only consider setting up of the EU central bank supervisory council by the end of 2012. That seems like an effort to buy time till the US elections get over before Germany decides to pull the plug on the euro. Also given the issues of national sovereignty and control, chances of delay or complete failure are also significant.
Routing funds directly to European banks doesn’t address a basic problem; that the banks in the region are heavily exposed to sovereigns, which may only grow over time and doesn’t break the deadly connection between the two. Also, it doesn’t address the fact that banks are dependent on the European Central Bank for short-term funding.
Also Germany has legitimately demanded all capital infusions are subjected to specific conditions since EU rules allow lending to sovereigns only since it has little control over foreign banks. One potential condition is underwriting of loans by national governments, compensating any losses suffered by the EFSF or the ESM.
Also the intervention by the EFSF/ESM to bring down borrowing costs for Spain and Italy by purchasing bonds is a new wine in old bottle that was agreed last year. A member needs to execute a Memorandum of Understanding that involves less stringent conditions than a full-blown bailout. Last week’s summit statement confirms future assistance will be conditional. In fact if at all, it ensures less ECB involvement than under the present Securities Markets Programme.
Also the €120- €130 billion committed for investments to boost growth is a clever repackaging of unspent funds and is unlikely to become operational soon. The communiqué was also silent on Europe-wide deposit insurance scheme even though there’s possibility that the new proposed banking regulator may outline the details later.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2536
GBP/US$ – 1.5527
GBP/CHF – 1.5067
GBP/CAN$ – 1.5758
GBP/AUS$ – 1.5120
GBP/ZAR – 12.6725
GBP/JPY – 124.01
GBP/HKD – 12.0420
GBP/NZD – 1.9241
GBP/SEK – 10.8170
EUR: The single currency lost ground against both the cable and the greenback after the European Central Bank not only cut refinance rates by only 0.25 percent to a record low of 0.75 percent, as widely anticipated, but also reduced deposit rates by 0.25 percent to zero, surprising the markets. Also dovish statement from ECB President Draghi weighed on the single currency, driving the GBP/EUR to a near four year high of 1.2553 and the EUR/USD pair to a four week low of 1.2400. The ECB’s aggressive policy measures yesterday managed to eclipse the BoE’s £50 billion asset purchase programme, more than offsetting any anticipated weakness of the cable due to further QE by the BoE. The European economic data calendar is weak today while the all-important US non-farm payrolls data is due from the other side of the pond. The GBP/EUR opens at 1.2531 this morning.
USD: The moves announced by three major central banks; the Bank of England, the European Central Bank and the People’s Bank of China, to boost growth, defined the movements yesterday in the currency market. The BoE announced further QE of £50 billion as anticipated, keeping interest rates unchanged at 0.5 percent. The pound initially popped against the greenback, but soon lost ground as US ADP employment numbers came in better than anticipated, pushing the cable low to 1.5498. Today’s movement will be dictated by US non-farm payrolls data for June any surprise upward movement may have long-term effects. The GBP/USD opens at 1.5517 this morning.