Good morning and welcome to today’s foreign exchange market commentary on Friday, the 1st of June.
The continuous slide of the single-currency is not that bad after all, particularly for the Germans. The problem is that a devaluated euro won’t save the eurozone, least of all the beleaguered peripheries. Exchange rates can pop or sink economies as a weak currency makes exports more competitive and fights off cheaper imports. The size of monetary/fiscal stimulus depends on who they trade with and the capacity to trade. Germany emerges a winner on both counts, not Spain or Greece.
Exports contribute 47 percent to Germany’s economy, compared to Spain’s 26 percent and Greece’s 22 percent. Despite recessionary conditions, Germany managed to ratchet up a trade surplus of EUR 158 billion. This compares starkly with Greece’s total export of EUR 16 billion only. Even after five years of contraction, when import demands were suppressed substantially, Greece’s current account deficit – a measure of a country’s export competitiveness, stands at a whopping 9.8 percent.
A weaker euro helps in trade with non-euro economies. But here too the peripheries are at a disadvantage. In 2011, 39 percent of total exports went to the US and Asia from Germany where as only 24 percent of Spanish goods and services went outside Europe. A weaker euro will help pushing down the price of a Mercedes or an Audi. The world is going to love it!
The problem lies again with the euro itself. Greece and Spain needs to get cheaper against the world, including their stronger neighbours. Without that, poor peripheries will continue to suffer as their rich neighbours get richer.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2432
GBP/US$ – 1.5374
GBP/CHF – 1.4946
GBP/CAN$ – 1.5905
GBP/AUS$ – 1.5855
GBP/ZAR – 13.0925
GBP/JPY – 120.60
GBP/HKD – 11.9291
GBP/NZD – 2.0437
GBP/SEK – 11.193
EUR: The single-currency hit a fresh 23-month low against the greenback on Thursday as negative sentiments and positive month-end demand pushed the EUR/USD pair to 1.2335. The euro also hit 12-year low versus the Japanese yen as demand for safe-haven assets soared. The euro had found some support over rumours of a bailout package being prepared by the International Monetary Fund, but lost traction after the IMF denied of such developments. The cable however, failed to capitalise over the euro’s weakness as it came under pressure against the greenback and the GBP/EUR pair dropped to 1.2441. The economic calendar is light from the UK and Europe today and softer then expected PMI reading drove the GBP/EUR lower to 1.2378 this morning. The GBP/EUR pair opened at 1.2382 this morning.
USD: Month-end demand and the overall negative sentiment pushed the USD higher against most of its global peers Thursday as investors sought refuge in safe haven assets on Spanish banking worries. The overwhelmingly risk-negative sentiment sent the GBP/USD pair to a low of 1.5360, the lowest level since mid-January. The greenback seemed more attractive after the Chicago PMI reading for May dropped sharply, stumping analysts. The US economic data calendar is heavy today with the non-farm payrolls and May ISM manufacturing index reading due for today. The GBP/USD pair opens at 1.5281 this morning.
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Have a great weekend!