Germany Facing Bitter Reality

Germany Facing Bitter Reality

By Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Monday, the11th of June.

Germany is facing a bitter reality now which started in 1998, when Berlin was pushed to swallow European monetary union. Everybody is pushing the Germans today to be more accommodative; debt mutualisation, fiscal union, joint bank-deposit insurance, banking union, Eurobonds – they all essentially mean one thing; the Germans underwrite the rest of the EU.

However, beyond the depressing economics of the above proposals, Germany must find a way to get out of this mess as quickly and cheaply possible. It needs to sell the burden of the enormous bailouts as a loss-cutting exercise to its voters: lesson on sunk costs, while recapitalising its own banks.

Many economists have been pushing the mercury up, arguing Germany benefits massively from exports to its neighbours due to the fixed exchange rates of the single currency. The fact of the matter is that such short-term benefits are grossly exaggerated and the Germans are going to find out shortly that the rest of the EU is taking them for a ride. Berlin is selling goods to its neighbours for worthless IOUs now and will have to lend its neighbours in the future so that they can buy its exports. It’s quite possible that the Germans will find shortly that the post World War 1 history is being rerun in today’s Europe; that they are being made to pay crippling amounts to foreigners for which they really don’t have any responsibility.


GBP/EURO – 1.2306
GBP/US$ – 1.5551
GBP/CHF – 1.4791
GBP/CAN$ – 1.5882
GBP/AUS$ – 1.5586
GBP/ZAR – 12.8645
GBP/JPY – 123.72
GBP/HKD – 12.063
GBP/NZD – 2.0031
GBP/SEK –  10.9590

EUR: Markets remained focused on Spain on Friday as the suspense over Spanish banking recapitalization reaching climax with unverified reports of an imminent bailout request by Madrid over the weekend hitting the wires, only to be refuted by the Iberian nation later. Spanish bonds witnessed a near sell-out, pushing 10-year yields up to 6.25 percent though equities rallied over bank-recapitalization rumours as well. Economic data from the core economies was less encouraging with Germany’s export dropping 1.7 percent over the previous month in April while imports slipped 4.8 percent. The EUR/USD pair dropped to 1.2436 subsequently, but strong rumours of the banking bailout triggered short covering, driving the pair up to 1.2517 by the day’s close. The GBP/EUR remained mostly flat for the day, trading in the 1.2360-1.2390 range. Friday’s rumours turned out to be true with EU leaders agreeing to lend €100 billion to Madrid to shore up its ailing banks. Further short covering on euro-positive news may push the single currency higher against its global peers on Monday. The GBP/EUR pair opens at 1.2320 today.

USD: The greenback gained against majority of its peers on Friday as risk appetite diminished following Fitch’s downgrading of Spain and Fed Chairman Ben Bernanke’s disappointing testimony to the US Congress. The US Treasury yields, oil prices and European equities all fell as investors flocked to buy safe haven US debts. The dollar index, a barometer of the greenbacks strength against a basket of six currencies, hit its three month high on the back of heightened volatility in global markets. The pound came under pressure against the USD as UK producer prices, an indicator of inflation, came in at its lowest level since Nov. 2009. The cable is likely to breach the 1.5550 level on the back of Spanish bank-bailout development over the weekend. GBP/USD opens at 1.5537 this morning.



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