Europe’s other threat

Europe’s other threat

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 13th of November.

European officials, policy analysts and international investors seem to suggest the worst is behind us. The single currency has firmed up by nearly 10 percent since Mario Draghi’s public pledge for support. Also borrowing costs for Spain and Italy have fallen dramatically while the Euro VIX, a measure for the common currency’s volatility expectations, has fallen significantly.

So far European leaders have been consistent in their approach. They have put in place the European Stability Mechanism in October that can be activated to buy Spanish bonds if foreign investors refuse to and the ECB has announced the Outright Monetary Transaction program to buy sovereign bonds in the secondary markets. The leaders have also committed to design a single banking regulator by Jan 1, 2013 and activate it by the end of 2013.

These measures have taken off risks of banking crisis and future sovereign-defaults off the table, many would argue. Also European leaders have said pushing Greece out of the currency-union could be the region’s Lehman moment and the consequences could be catastrophic, meaning they would find some way to keep the nation on life support by resorting to some sort of creative accounting.

However, the real risk now stems from losing public support for running the long standing austerity policies. Growing support for neo-Nazi movements like the Golden Dawn – Greece’s third largest political party now, could take the centre-stage soon. Any populist Greek government that rejects the policy status quo set by the IMF and the EU will be summarily cut off by the ECB, forcing it to exit the union. A Spanish government will meet the same fate if it did likewise, and borrowing costs will skyrocket.

Some may argue the warnings of a severe political outcome are overblown. Even in Greece the Golden Dawn is a minority party. But remember, the Nazis captured power within four years of the onset of the Great Depression. Europe must formulate policies that hold out promises for stronger growth and lower unemployment rates in future. Otherwise, it may be a rude wake-up call sooner than later.


GBP/EURO – 1.2505
GBP/US$ – 1.5867
GBP/CHF – 1.5061
GBP/CAN$ – 1.5881
GBP/AUS$ – 1.5241
GBP/ZAR – 13.9341
GBP/JPY – 125.61
GBP/HKD – 12.3012
GBP/NZD – 1.9412
GBP/SEK – 10.7346

EUR: The single currency weakened over the past 24 hours and continued to trade near two-month low levels after Greece’s international creditors failed to agree on the country’s bailout program. Euro group president Jean-Claude Junker said the Iberian nation’s debt should come down to 120 percent of GDP by 2022 whilst IMF chief Christine Lagarde said the milestone should be reached by 2020. The disagreement has continued to weigh on the euro and the EUR/USD pair fell to 1.2720. We have the German ZEW economic sentiment data due today and given the negative run of economic data, any positive gain will be welcomed. The meeting of the Euro group Finance Ministers continues in Brussels today. The GBP/EUR pair opens above the 1.2500 level today morning.

USD: The greenback gained against most of its peers yesterday in thinner than usual holiday trading as US banks and bond markets remained closed for the Veteran’s Day holiday. The GBP/USD pair traded at 1.5877 versus 1.5901 on Friday after US retail sales data for September came in at 1.1 percent, beating estimates. We have the US inflation data due later today while markets will look out for indications of further QE in the comments accompanying the Bank of England’s statement on monetary policy. The continued disagreement over how Greece manages its debt has added to the “risk off” sentiment and the GBP/EUR opens lower at 1.5859 this morning.

Have a great day!


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