Good morning and welcome to today’s foreign exchange market commentary on Friday, the 15th of June.
As Greece goes to election in next two days, the Greeks are facing the classic dilemma of Scylla and Charybdis. The must either choose the pain of continuing with the euro or a complete chaos of bringing back the drachma. Avoiding both is not an option.
Greece is in dire straits; the economy has contracted over 15 percent since its peak in 2008 and unemployment is at a staggering 22 percent. Further spending cuts and austerity measures that are required for the next tranche of bailout money are unlikely to improve Athens’ lot.
The current miseries, or some of it, were inevitable as Greece’s fiscal deficit and current account deficit had both jumped 15 percent of GDP by 2009; but the situation were made worse by the Greek politicians.
Though things are terrible now, all hope is not lost. The budget deficit, excluding interest payments, has declined by 9 percentage points of the GDP and the economy is getting more competitive. Unit labour costs have fallen by half by the end of 2011 and wages are expected to fall further as minimum wage was reduced in the beginning o this year.
A strong government is now needed to stabilise the country. For one, tax collection has to be made more efficient. A deal with IMF/EU/ECB is required to extend its loans while securing more investment to boost growth.
To achieve that, a strong leadership is required. Or else, the Greeks may get sucked into the drachma whirlpool of Charybdis.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2302
GBP/US$ – 1.5534
GBP/CHF – 1.4778
GBP/CAN$ – 1.5903
GBP/AUS$ – 1.5512
GBP/ZAR – 13.0204
GBP/JPY – 122.56
GBP/HKD – 12.0542
GBP/NZD – 1.9834
GBP/SEK – 10.901
EUR: The single currency moved higher against the GBP and USD on short coverings by traders ahead of the weekend and on speculations that world central banks are getting ready their “bazookas” to fire in case of a Greece exit following Sunday’s elections. The news helped Italy sell EUR 4.5 billion in government notes, albeit at a higher rate. However, it was not all smooth-sailing yesterday as the Spanish 10-year yields breached the 7 percent barrier, ostensibly due to Moody’s cutting the Iberian nations ratings by three notches. The GBP/EUR finished at 1.2312, well below the day’s high of 1.2368 while the GBP/USD ended just short of 1.2600. The single currency is expected to be driven by the outcomes of the Greece election over the weekend. GBP/EUR opens at 1.2280 this morning.
USD: The GBP/USD pair rallied yesterday, stopping just short of the 1.5550 level on the back of strong corporate demand ahead of Sunday’s Greek elections. Investors were all ears for the Mansion House speech by Bank of England Governor Sir Mervyn King for hints of another round of assets purchase. Thursday’s speech didn’t push the cable lower immediately as Sir King announced £100 billion of cheap-credit for the UK economy to preempt any liquidity crisis. The GBP/USD however, tumbled to a low of 1.5475 as news of coordinated action by global central bankers hit the wires following Sunday’s election. We have the US manufacturing data today though all eyes are now set on weekend’s Greek elections. The GBP/USD opens at 1.5507 this morning.
Have a great day!