The great European divide

The great European divide

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 5th of March.

The European Union’s economic outlook (the latest one) paints a sordid picture for the currency union. While unemployment rate in Germany, Austria and the Netherlands are expected to rise to or above 5 percent in 2014, it will be about 15 percent in Portugal and Ireland, but more than 25 percent in Greece and Spain. Per capita gross domestic product will be almost seven percent above its pre-crisis level in Germany, but about seven percent below in Ireland, Spain and Portugal – and a scary 24 percent below in Greece.

Needless to say, such a great divide is unlikely to be sustained for long. A country that is in depression can’t have monetary policy of their counterparts who enjoy full or close to full-employment. Indeed, the biggest question for the currency union is whether the gap between the struggling and prospering members is widening.

The optimists argue that an adjustment process is underway, as mirrored in economic performance, despite no visible signs of improvement in the labour market. External accounts surely matter since they reflect the balance between domestic investment and saving. Until 2007, private debt accumulated at a brisk pace as imbalances within the euro-zone resulted from either investments in real-estate or too little domestic savings. So the recent improvement in external deficit is impressive. While the current-account balance has swung into surplus in Ireland, in Portugal, Spain and Greece, they have shrunk by more than seven percentage points of the economy.

Unfortunately, the contraction in deficit has been largely caused by a fall in domestic demand. In Ireland and Greece, the decline is about one-quarter since 2007 while for Spain and Portugal, it’s about one-eighth.

A demand contraction was inevitable as these countries were living far beyond their means. An economy can’t sustain a demand growth rate that is higher than GDP growth rate. But since 2007, consumer demand contraction has been faster than domestic investment, which is worrisome.

The news is better on the export side as exports/GDP ratio has improved for all the economies. Spain’s performance has been particularly impressive. It’s exports outside the EU were one-fourth of French non-EU exports when the shared-currency was created; today they are near half the French level.

The austerity-induced pain will probably payoff in the long run. However, the societies may run out of patience in the meantime.


GBP/EURO – 1.1588
GBP/US$ – 1.5112
GBP/CHF – 1.4221
GBP/CAN$ – 1.5512
GBP/AUS$ – 1.4762
GBP/ZAR – 13.6972
GBP/JPY – 140.71
GBP/HKD – 11.7116
GBP/NZD – 1.8232
GBP/SEK – 9.6654

EUR: The euro was on the back foot yesterday, falling below the 1.30 mark against the US dollar and rising above the 1.16 level against the pound as the political gridlock continues in Italy. Downbeat economic news from the euro-region weighed on the common-currency as investor confidence reading fell short of expectations in March though Spanish unemployment rise showed signs of slowing down. We have the euro services and retail numbers due today though UK services data is expected to remain in focus for the day. The Economic And Financial Affairs Council (ECOFIN) meetings continue from the Eurogroup meetings yesterday and finance ministers from the region are expected to discuss the Italian political deadlock alongside Cyprus’ bailout deal. GBP/USD moved above the 1.160 mark this morning.

USD: The US dollar traded had a mixed day yesterday, gaining against the euro, but weakening against the pound. The shared currency fell below the psychologically important $1.30 level during the day’s trade after concerns about a Italian downgrade resurfaced following the country’s inconclusive elections. The GBP/USD pair however advanced, trading at 1.511 compared with 1.5028 in the previous session. The ICE dollar index, a gauge of the US unit’s worth against a basket of six global currencies, fell to 82.214 from 82.265 on Friday. The dollar bought 93.46 yen in New York, lower than 93.58 late on Friday after the incoming Bank of Japan governor Haruhiko Kuroda told lawmakers that the central bank’s current assets program wasn’t sufficient to end deflation and achieve the targeted 2 percent annual inflation. Kuroda also reported said it was difficult to buy large quantities of international bonds under present rules on currency, according to Reuters.

UK retail sales number smashed analysts’ forecast this morning as like-for-like sales rose at 2.7 percent over the previous year, the fastest increase in three years. Cable has pushed above 1.510 and further gains will depend on larger services sector release. Today’s main release from the other side of the water will be monthly non-manufacturing PMI for February.

Have a great day!


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