The Italian electoral message

The Italian electoral message

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 8th of March.

The message that Italy sent through its general elections is clear; the austerity measures being pursued by European leaders are not working.

The euro project, no matter how idealistic it was, was a top down approach. But circumventing the democratic process to encourage unelected technocrats to run the country has only worsened the situation. The fact is; much of Europe is in depression. Italy’s loss of output since the beginning of the crisis is as great as it was during the Great depression of the ‘30s. Both Spain and Greece’ youth unemployment rate exceeds 50 percent. The region’s future is in jeopardy and the social fabric is breaking.

The economists say Europe must stay on course and things will get worse before they get any better. Political leaders who oppose austerity are branded as populists. But the problem is that the cure is not working. In fact it will take a decade or more to recover the losses incurred in the austerity process.

Europe’s physical, natural and human capitals are severely under utilised today. Needless to say, a prescription that entails waste on this scale can never be the solution. The oft repeated diagnosis of Europe’s current misery, that the peripheral countries were living beyond their means, is only partially correct. Spain and Ireland had low debt/GDP ratios and fiscal surpluses before the crisis.

Rather, greater fiscal federalism, and not just centralised oversight of national budgets could work. Clearly Europe needs far more European level expenditures and latest efforts to cut future spending are surely misguided. Similarly, a banking union with a common deposit insurance scheme or common supervision is grossly inadequate.

European leaders recognise debt burdens will only grow worse in the absence of growth. And austerity policies are strictly anti-growth. Still, there is no growth agenda on the table. Also lacking is any agenda to addressing Europe’s internal imbalances.

An internal devaluation – that is forcing down wages and prices, is unlikely to work. Rather the debt burden of the households, private firms and governments will only become bigger. Internal devaluation, combined with austerity and single-market principle is a toxic combination that results in flight of capital and hemorrhaging of banking system.

The European project was a political idea to promote solidarity and enhance prosperity. But it has resulted in disharmony and bitterness within and between countries.


GBP/EURO – 1.1452
GBP/US$ – 1.4998
GBP/CHF – 1.4167
GBP/CAN$ – 1.5456
GBP/AUS$ – 1.4620
GBP/ZAR – 13.7078
GBP/JPY – 142.97
GBP/HKD – 11.6194
GBP/NZD – 1.8149
GBP/SEK – 9.4968

EUR: The euro advanced significantly on Thursday after European Central Bank President Marion Draghi kept the benchmark interest rate on hold and said he expects the region’s economy to stabilise later this year. Draghi said a rate cut is unlikely in April and hoped economic activity would improve given the central bank’s accommodative stance and a strengthening global backdrop. Today sees the release of German industrial output data and markets expect an improvement over last month’s reading. However, keeping in mind weaker than expected factory orders reading, a negative number should not come as a huge surprise. Today’s US non-farm payrolls is expected to have significant influence on the euro crosses. Expect the GBP/EUR pair to consolidate today.

USD: Sterling jumped over the $1.50 level yesterday after the Bank of England decided not to add further stimulus this month and kept interest rates unchanged. Markets had anticipated a GBP 25 billion QE and positions were quickly unwound as traders adjusted to the news. However, much of gains slipped away by afternoon and sterling dropped well below the 1.15 level against the euro and drifted toward 1.50 against the US dollar. Better than expected ADP number pushed the dollar to a two and half year high against sterling ahead of today’s highly influential non-farm payrolls figures. Consumer credit also rose by $16.2 billion in January, ahead of expectations. On the downside, the trade balance figures worsened in January with deficit widening to $44.45 from $38.5 billion in the month before and pushed EUR/USD above the 1.310 level again. Today’s nonfarm payroll data, along with overall unemployment rate, will influence the dollar’s movement and expect volatility on weaker than expected releases.

Have a great weekend!


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