Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 24th of April.
Following the renewed uncertainty over the fate of euro following the collapse of Dutch government, the role of the International Monetary Fund has come under focus. Since the IMF managed $430 billion in fresh funding commitments, largely from the non-EU members, questions are being asked how the lending agency plans to use the money since some of the recent developments suggest that lenders don’t call the shots despite bailing out economies.
Take the case of the recently agreed fiscal compact treaty that requires the EZ economies to cut deficits and balance their budgets. Within weeks of signing the deal, Spain unilaterally revised its deficit targets higher. This was followed by Italy that refused to enforce bigger spending cuts even if the economy witnessed bigger that estimated contraction, citing risk deeper recession. The previous high priest of austerity – the Dutch, has now found out that even it can’t push through austerity measures unilaterally while Francois Hollande has promised less spending cuts and more growth oriented measures. Clearly the austerity consensus is retreating.
Also banking policy is being put under the scanner. The relationship between banks and states has been unhealthy, with states bailing out troubled banks, risking their own credit ratings. This in turn hits banks, which load sovereign bonds for capital requirements, thus completing the vicious cycle.
The IMF proposal to break this chain and putting money directly into banks is welcome, provided the policy is followed by EU wide banking supervision. With a bigger war-chest that has contributions from rest of the world; the lender can now dictate terms before it writes further checks to struggling economies.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2245
GBP/US$ – 1.6131
GBP/CHF – 1.4722
GBP/CAN$ – 1.5981
GBP/AUS$ – 1.5701
GBP/ZAR – 12.6412
GBP/JPY – 130.59
GBP/HKD – 12.5249
GBP/NZD – 1.9841
GBP/SEK – 10.889
EUR: Markets remained focused on the political drama going on in Europe after the Dutch cabinet and the PM resigned after differences over budget deficit cropped up. The Spanish yield breached the 6 percent mark after European flash PMI and French business confidence came below expectations. The single currency got battered against the greenback and the pound with the GBP/EUR pair hitting a 20-month high of 1.2271. There’s no major data expected from Europe today while the UK public sector net borrowing reading is due in the morning. The GBP/EUR pair opens at 1.2254 this morning.
USD: The cable held its ground against the greenback yesterday despite appetite diminishing over a possible China slowdown and political turmoil in Europe. The GBP/USD pair dropped to 1.078 in early trades only to bounce back later to touch an intraday high of 1.6131. The market will stay focused on the US consumer confidence and housing data today and may decide the pair’s movement ahead of the Fed’s FOMC meeting tomorrow. The GBP/USD pair opens at 1.6149 this morning.