Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 31st of May.
Though Greece is in the eye of a storm and has been hogging the limelight for months, Spain is pretty much on its way to become the new poster-boy of the European crisis. The focus will soon shift to “Spexit” – Spain quitting the euro, from “Grexit” now.
There is a growing consensus that the summer will be a turbulent one with Spain quitting the euro before Greece. For one, Spain is too big to rescue. They are fed up with the spending cuts already and have no qualms about leaving the eurozone since there is a much bigger Spanish speaking diaspora to grow into. There are few compelling reasons for them to stay in the EZ and the Spaniards show little will to endure the sacrifices that the currency will demand.
As the economy stumbles from bad to worse, the yield on 10-year bonds are close to highs seen at the depths of the crisis. The banking industry is set to witness a full-scale run as there is a growing concern whether Madrid can recapitalise its banks that require about €100 billion. Every property bubble burst in history has been followed by a baking crisis. Spain can’t be an exception.
The Greeks have to put up with the bitter pills prescribed by Brussels and Berlin. But that is not the case for Madrid. Bailing out Greece is easy since its GDP is only worth €230 billion. Even if the EU decides to subsidize the GDP perennially, injecting 10 percent annually would only cost €23 billion; crumbs. However, Spain can’t be rescued. It needs to help itself.
Spain also has a real economy, unlike Greece, which barely makes anything. Madrid’s exports contribute a respectable 26 percent to the economy, at par with France, Italy and the UK. It has a raft of successful export industries and has no reason to fear a life outside the euro.
Lastly, the Spanish horizon is much bigger. The EU market is only part of its export basket. It also has a booming Spanish speaking Latin American market along with the sizeable Hispanic market in the US. Historically, the country has always looked at the bigger global opportunities, much like the UK.
The taboo of leaving the euro is gone and a lot of pundits in the country are arguing in favor of the peseta. Hence a Spexit might occur sooner than a Grexit. Why tie yourself to a project that is clearly failing?
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2525
GBP/US$ – 1.5500
GBP/CAN$ – 1.5940
GBP/AUS$ – 1.5932
GBP/ZAR – 13.2220
GBP/JPY – 122.30
GBP/NZD – 2.05220
GBP/PLN – 5.5000
EUR: The ongoing crisis in Spain and Greece continued to drag the single currency down as sentiments turned further negative yesterday as the eurozone economic data printed lower and borrowing costs for Italy soared. Spain’s borrowing costs breached the unsustainable seven percent mark, prompting Ollie Rehn, the EU monetary affairs chief to grant Spain a one year extension on its debt reduction pact. Meanwhile German two year borrowing costs dropped to zero percent, showing the depth of current risk aversion among investors. The EUR/USD pair slipped to 1.2362, the least since July 2010 while the GBP/EUR remained mostly rage-bound around the 1.2500 level. The economic calendar in the eurozone is light today and the EUR negative momentum is expected to continue. The GBP/EUR pair opens at 1.2494 this morning.
USD: The greenback continued to strengthen as demand for safe haven assets grew unabated, driving the dollar index to Sep 2010 levels. The cable took cue from the EUR/USD pair and the GBP/USD pair fell to a four month low of 1.5475 as investors remained wary of the impact on the UK economy if the euro breaks up. The US economic calendar is relatively light with the ADP payroll report for May, a precursor to tomorrow’s non-farm payroll report, due today. The GBP/USD pair opens at 1.5513 this morning.