Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 6th of June.
Last week the markets witnessed a mad rush to buy US, UK and German bonds, driving yields to record lows. Since Britain and America have their own sovereign currencies, repayment on maturity is guaranteed. However, the rush to buy bunds remains unanswered.
The obvious explanation seems to be pure panic and faith in Germany’s robust economy. That alone however, is not the full story. The other credible explanation is that the markets are betting on a euro breakup.
There’s no doubt that the single-currency zone can survive only if Germany agrees to shoulder a substantial part of ClubMed debt. The reality is very clear. Germany needs to lend directly to the peripheral states, or underwrites loans by the lifeboat funds, or underwrites the borrowing by the member country governments, or agrees to backstop the Spanish bank borrowings, or … the list seems long.
The solutions being talked about now involve the so-called “joint responsibility.” However, nobody in Germany will be comfortable with the idea of Spain, Greece et al coming onboard as joint guarantors for massive loans to sort out the present mess. The very idea of the ClubMed countries underwriting their own loan looks hilarious, if not tragic in the first place.
The situation can be salvaged, if the ECB starts to print money with the permission of the council, where Bundesbank holds sway. However, excess money supply will weaken the euro, which makes German debt unattractive. Investors would rather hold high yielding Spanish or Greek debts to compensate for the high inflation that printing money will follow, but not low-yielding German debts.
So the only plausible explanation is that the markets are betting on Germany quitting the EZ, in which case holding bunds denominated in Deutsche mark are far more attractive than bonds denominated in drachma.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2362
GBP/US$ – 1.5445
GBP/CHF – 1.4855
GBP/CAN$ – 1.5961
GBP/AUS$ – 1.5695
GBP/ZAR – 12.9314
GBP/JPY – 121.86
GBP/HKD – 11.9832
GBP/NZD – 2.0263
GBP/SEK – 11.1121
EUR: The single currency witnessed steep decline against the greenback yesterday from its earlier 1.2500 level to the 1.2400 level as Spanish Budget Minster Christobal Montoro said at the current borrowing rates the Iberian nation is effectively shut out of the capital markets. The EUR/USD suffered a further setback, losing 70 points quickly as the latest Eurozone retail sales reading showed a one percent drop versus an expected decline of 0.1 percent. The euro however stabilized later after Japanese finance minister expressed concerns over excessive currency volatility, which pushed the markets to sell the yen on intervention fears. The GBP/EUR pair remained range-bound yesterday and took cues from the EUR/USD pair. The single currency’s movement is expected to be decided by the all-important ECB meeting today. The GBP/EUR pair opens at 1.2364.
USD: The lack of tier 1 economic data and the ongoing Jubilee bank holiday celebrations in the UK ensured that the GBP/USD remained quiet on Tuesday. The cable retreated from its earlier level of 1.5400 to 1.5320 as the greenback gained strength over continued risk aversion. The US economic data calendar is light today while Construction PMI data is due from the other side of the pond. The real focus today will remain on the ECB interest rate announcement while the Fed Chairman Ben Bernanke is due to testify before the US lawmakers on US economy tomorrow. We also have the Bank of England announcing its interest rate decision tomorrow that may cause some volatility to the GBP/USD volatility. The GBP/USD opens at 1.5476 this morning.