Exchange Rates and Market Commentary [24/10/2011]

Exchange Rates and Market Commentary [24/10/2011]

Good morning. The European summit held on Sunday failed to produce any breakthrough as expected. However, there were promises of concrete action after Wednesday’s meeting. Some progress was made over the region’s bank recapitalization requirements – core tier 1 capital has been pegged at 9% and should be complied with by June 30, 2012, while limits have been imposed over executive bonuses and dividend payouts till the criterion has been met.

The real bone of contention however, remains the amount of ‘‘haircut’’ that private investors are required to take on Greek debt. The troika of IMF/EU/ECB said in order to bring down Greece’s debt-to-GDP ratio to 120% from the current 145% by 2020, a whopping 50% ‘haircut’ (plain loss in simpler terms, bonds supposed to fetch £100 on maturity will be settled for £50) is required. To bring the debt-GDP ratio down further, a 60% cut would be required. On the brighter side, the next tranche of Greek debt has been released by the EU finance ministers (to help fund debt with debt).

Meanwhile French President Sarkozy backed down from his previous claim of giving the ECB near unlimited borrowing power after German Chancellor Angela Markel refused to budge. Instead the EU may turn to emerging economies requesting them to participate in its struggling bond market. It does look a little stretched since the PIIGS nations of euro zone – led by Greece, suffer from a huge trust deficit. China may hold more than $3 trillion of currency reserve, but will be unwilling to lend unless bonds are underwritten by the ECB. “Between now and Wednesday, some members of the European Council will have to convince colleagues that their country is implementing the promised measures fully,” said Herman Van Rompuy, president of European Council, after chairing 12 hours of talks on Sunday.

There is a bit of political economy involved though, and it may be taking place on the other side of the Atlantic. 2012 is the US election year. If Greece defaults, there is every possibility of a chaos in the global financial markets, that may result in a double-dip recession for America (or Britain for that matter), something President Obama can ill-afford in an election year. So Ms Markel may not agree to write blank checks, but she will not rock the boat too hard as well.

“There are two options on the table for making the most efficient possible use of the EFSF and neither of them involve the ECB, as was discussed yesterday in Brussels,” said German government spokesman Steffen Seibert today morning.

“They will now be technically studied and elaborated so that we will be in a position by Wednesday to talk about what will be implemented,” he added.


GBP/EURO – 1.1482
GBP/US$ – 1.5942
GBP/CHF – 1.4107
GBP/CAN$ – 1.6057
GBP/AUS$ – 1.5368
GBP/ZAR – 12.7542
GBP/JPY – 121.46
GBP/HKD – 12.4090
GBP/NZD – 1.9842
GBP/SEK – 10.4812

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EURO: The EUR/USD pair climbed from Friday’s 1.3760 level to 1.3870 today morning over hopes of positive development on Wednesday’s scheduled EU meeting. The GBP/EUR pair traded at 1.1540 on Friday after better than expected (lower) UK government borrowings boosted sentiments. The cable lost ground slightly this morning and opened around 1505 level.

USD: The GBP/USD pair surged on Friday and broke the 50-day moving average 1.5895 level. The main driver remains lower borrowing by the UK government – £11.4 billion against the expected £12 billion, for the month of October. Cable opened at 1.5960 today morning.

Elsewhere, the AUD and the NZD pair continued their forward march since Friday morning.

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Have a great day!


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