By Sayan Guha.
Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 28th of June.
Yesterday’s report by the British Banker’s Association showing mortgage approvals dropping to their lowest levels in more than a year shows the deepening crisis. However, Britain had its “Golden Age” from the 1990 till the subprime crisis. Between 1993 and the first quarter of 2008, the GDP grew at rates ranging from 0.5 percent and a fantastic 5.2 percent. The economy grew at 3.1 percent on average for 16 long years.
Unfortunately, the crux of the problem is the biggest borrowing binge in history that Britain went on, stealing growth from the future generation. Personal debt exploded from under £400 billion to over £1.4 trillion between 1993 and 2008, meaning to pay for expensive homes and live the high life, the national debt burden vaulted 256 percent.
Reality struck after 2008 when the downhill journey began. The government threw in £1.5 trillion in tax-payers money to save the banks from systemic collapse even as the country embarked upon the longest and the deepest recession in history since the thirties.
Today, it has become clear that the government, businesses and individuals all became highly leveraged during the boom years. The new focus is on reducing debt as governments introduce austerity measures and companies hoard cash while individuals focus on personal savings.
However, this could hardly be the prescription for growth as evident from the double-dip recession that hit us. Collective reduction of spending creates a vicious cycle of falling demand, negative growth and rising unemployment. Excess spending cut is the paradox of thrift. Ireland has showed strict austerity results in prolonged contraction rather than a swift return to growth.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2504
GBP/US$ – 1.5624
GBP/CHF – 1.2512
GBP/CAN$ – 1.5993
GBP/AUS$ – 1.5453
GBP/ZAR – 13.13
GBP/JPY – 124.16
GBP/NZD – 1.9653
GBP/PLN – 5.3287
EUR: The cable soared to a near four-week high of 1.2514 against the single currency on Wednesday after German Chancellor Angela Merkel turned down suggestions for joint-euro area bonds. The catalyst for the gain was June retail sales number that rose fastest in 18 months, helped by Queen’s jubilee celebrations. The rise could have been sharper had a separate report from the British Banker’s Association not shown mortgage approvals dropped to their lowest level since April 2011. Traders chose to remain neutral ahead of the two-day meeting starting today and were unwilling to commit large positions due to the risks involved. However, any ground-breaking development seems unlikely today or tomorrow and markets expect a “roadmap” to greater political and fiscal being announced on Friday. The GBP/EUR opens at 1.2500 this morning.
USD: Cable ended the day well off its early high of 1.5634 against the USD Monday after a British Bankers Association report showed mortgage approvals dropped to its lowest level in more than a year, sparking speculations of another round of QE. A late market report suggested China may intervene in the currency market to prop up the renminbi, meaning it will be selling GBP, USD and AUD to rebalance its currency basket, pushing the cable down to 1.5544, the lowest level for the day. The focus today will remain on the Brussels summit which will likely override all other developments. The GBP/USD pair can slide further if Europe disappoints today. The GBP/USD pair opens at 1.5531 this morning.