Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 21th of August.
Is the euro dead?
There are many people who wonder when will the single currency finally collapse? The answers can be varied, depending upon whom you are asking. But the bitter truth is nobody really knows. Euro’s life can be extended by staggering it from crises summits and bailouts for another decade. Then again it may get over next month if Greece is refused the third bailout tranche for failing to adhere to its austerity targets. Athens will get the boot and the single currency may unravel as chaos and anarchy hits the market. However, whether the blowout happens next month or the next decade, it matters less than you would like to believe. If you’re wondering why, then the answer is simple: the euro is on its last leg already.
The euro still very much looks like a currency and the notes and coins are in circulation with merchant establishments willing to accept them, albeit grumblingly if you are in certain countries. But notes and coins are a small part of the currency system. A currency is also a store for value, a medium of exchange for goods and services and a facilitator of long distance trades. Euro has stopped qualifying on some these counts. Some countries can’t use it for import over fears that they will be suddenly replaced by liras and drachmas. Reports suggest some oil traders have refused to supply fuel to Greece already. Why? Well when payments become due in six months, they may receive money in a different currency whose worth is much less. Spain may not be far away from that day either.
Meanwhile, flight of capital continues unabated. Europe’s wealthy customers are buying up real estate in London, desperate to park their cash on safer shores. German and Italian cash tide has hit the Swiss shores, pushing the CHF higher. Within the common currency zone, everybody wants part of their wealth outside the region, unsure of the d-day. In short, faith in the currency is greatly diminished which doesn’t happen in a functional currency zone.
The outcome? Well, when a currency stops functioning the way it should be, the damage is immediate. Investments are delayed, trade slows down as people are unwilling to accept the currency and capital leaves the shores.
Output declines fast as unemployment soars. However, for countries like Spain and Italy, getting back to their old currencies is much better, even at a much depreciated rate, than having no currency at all. Make no mistake, but the countries that suffered the most during the crisis will bounce back the fastest. The question is when?
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2709
GBP/US$ – 1.5728
GBP/CHF – 1.5272
GBP/CAN$ – 1.5532
GBP/AUS$ – 1.4991
GBP/ZAR – 13.0494
GBP/JPY – 124.78
GBP/HKD – 12.19
GBP/NZD – 1.9380
GBP/SEK – 10.4899
EUR: Headlines and market speculations continued to drive the single currency on Monday with the German news magazine Der Spiegel reporting the European Central Bank may cap Spanish and Italian 10-year borrowing costs, providing some support in early trade. However, the Bundesbank’s monthly report released later in the day said Germany remains opposed to unlimited bond purchasing by the ECB, pouring cold water on initial euphoria. The GBP/EUR pair remained range-bound subsequently, trading in the 1.2700-1.2763 range even though Spanish and Italian borrowing costs dropped to six week lows. Markets are unlikely to be affected by the CBI Trends survey and UK public finances data and news over the ECB restarting the Securities Market Program is likely to drive the single currency today. GBP/EUR opens at 1.2704 this morning.
USD: The GBP/USD pair remained range-bound on Monday on yet another quiet August FX trading session. The pound took cue from the euro yesterday in the absence of any tier 1 Economic news yesterday. Lack of market moving economic data from the other side of the pond didn’t help the pound’s cause either leaving the greenback in a narrow band against its British counterpart. The UK public finances data for July is due today morning and a wider deficit is likely to damp investor sentiments though an upward revision of Friday’s second iteration of UK GDP may lift investor sentiments. Sterling is expected to take cue from eurozone developments in the absence of tier 1 economic data from the US today. GBP/USD opens at 1.5757 this morning.
Have a great day!