Good morning and welcome to today’s foreign exchange market commentary on Monday, the 9th of July.
Germans may not bail out the euro after all!
There is a widely accepted argument that rich Germany will ultimately bail the single-currency out. The reason: Germany benefits enormously from the euro. While it’s true that Germany’s trade surplus is soaring and the country is getting richer; the ordinary German is yet to enjoy the rewards of the riches. While it’s good for the large corporations, the benefits have hardly touched the ordinary folks.
True Germany has grown by 3 percent in 2011 and GDP is projected to grow by one percent this year while most countries in the region are shrinking or stagnating, prompting many to point out to the numerous benefits Berlin reap due to the common currency, the shops in Frankfurt or Munich are not exactly bursting at the seams. German retail sales have barely grown. Consumer spending has grown by a paltry 0.25 percent on an average since the euro was launched. Last year consumer spending grew at 1.5 percent, the fastest in five years, though it still remained at about half the rate of annual GDP growth. That doesn’t indicate growing disposable income! Labour costs in France, Italy and Spain have increased at a brisk pace while for Germans it has remained near flat since the EU came into existence. Unit labor costs have risen this year, but only very modestly.
The Germans have however excelled in generating employments, corporate profits and trade surpluses, which many attribute to a massively undervalued currency. While the ordinary German doesn’t get richer, everything extra they produce adds to corporate profits. Or the wealth is transferred to the periphery through the banks or through the tax system.
Either way, it’s a losing proposition for Berlin. If debt mutualisation occurs, German debt will soar as they have to take on the liabilities of the periphery. Alternatively if the euro breaks up, German banks will be straddled with massive debts and will have to be rescued by the government. Ordinary Germans have already figured out that the single currency is not working any better for them than the poor Greeks or the Spaniards. It’s difficult for politicians to convince the electorate unless they see themselves getting richer. So any deal that their leaders may agree to will most probably be defeated at the ballot.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2592
GBP/US$ – 1.5496
GBP/CHF – 1.5135
GBP/CAN$ – 1.5789
GBP/AUS$ – 1.5210
GBP/ZAR – 12.7614
GBP/JPY – 123.43
GBP/HKD – 12.0162
GBP/NZD – 1.9452
GBP/SEK – 10.8781
EUR: The single currency declined to its 3-1/2 year low against the cable on Friday with the GBP/EUR pair trading at 1.2604, its highest level since Lehman’s collapse in 2008. The single currency also retreated against the greenback as investors rushed to offload their euro-denominated assets with the EUR/USD pair dropping to 1.2264, its lowest level in two years. Risk sentiments soured for the day as Spanish 10-year borrowing costs breached the seven percent barrier while Italian 10-year yields rose above the six percent mark. The economic data calendar from Europe is light today and focus is expected to remain on the EU finance ministers meet today that may announce some interim measures on Spanish bank bailout terms. The single currency may witness further weakness today, particularly against the USD and the GBP, despite trading at a nine-year trade-weighted average low. The GBP/EUR opens at 1.2601 this morning.
USD: The greenback gained ground against sterling on Friday as US non-Farm payroll data for June failed short of expectations, adding 80,000 jobs against analysts’ estimate of 100,000. The dollar gained against most of its global peers as investors ran for cover over worries that the world’s largest economy is slowing down. Economists however, believe that the latest data is not bad enough for another round of quantitative easing by the Federal Reserve at its August 1 meeting. The economic data calendar from the US and the UK is light today and the GBP/USD pair is expected to take cue from investors’ risk sentiments. The GBP/USD opens at 1.5494 this morning.