Good morning and welcome to today’s foreign exchange market commentary on Wednesday, the 29th of August.
Economic data from the US continues to send out mixed signals and the latest to join the bevy of numbers are home price-rise index and consumer sentiments released yesterday. This gives rise to the debate on the success (or the lack thereof) of western style capitalism. From early 1980s to mid 2007 before the credit crisis struck, the American belief in free and unfettered access to markets had brought the world to near ruin while the benefits of deregulated capitalism had benefited the most elite in the richest of the countries. The income of average Americans, on the contrary, continued to decline or stagnate during this ideology’s 30-year reign.
With so much US national income going to so few, the US economic output growth had become unsustainable and could only be financed by a spiralling debt. In the light of the impending fiscal cliff that the US is expected to hit later this year, and the resurgence of right-wing economists, hopes for stronger regulation, greater equality and a better balance between markets and government lies shattered. This will again threaten the global economy, or at least Europe and America where these ideas continue to thrive, driven by special interest groups.
The right wingers override the basic rules of mathematics and economics. If expenditures exceed revenues and the Congress endorses it, then there’s bound to be deficits, which in turn needs to be financed. The right uses a straightjacket approach of not allowing national debt to increase, forcing expenditures limited to tax revenues and a wide deficit waiting for a default.
This raises the question of which expenses get priority, and if repayment of national debt does not, default seems inevitable. Additionally, cutting expenses in the middle of a slowdown brought on by the free market ideology, risks extending the downturn further. Rating’s agency Fitch’s warning to downgrade US credit rating over the impending fiscal cliff points to this problem.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2592
GBP/US$ – 1.5802
GBP/CHF – 1.5133
GBP/CAN$ – 1.5624
GBP/AUS$ – 1.5243
GBP/ZAR – 13.2971
GBP/JPY – 124.20
GBP/HKD – 12.2651
GBP/NZD – 1.9636
GBP/SEK – 10.4873
EUR: The single currency continued to gain traction yesterday, hitting a 7-week high against the USD and a 3-week high versus the pound on the back of better-than-expected Italian and Spanish bond auctions early on the day. Growing speculation surrounding the ECB’s next policy move after media reports said Mario Draghi has dropped out of Saturday’s Jackson Hole symposium was another reason for the euro’s strength as markets hypothesised the central bank is preparing for an important announcement for their September 6 meeting. News that Spain’s most indebted region Catalonia is preparing for a bailout failed to undermine the single currency and the GBP/EUR pair dropped to 1.2568, the least since August 7. The meeting between Italy’s Monti and Angela Merkel in the afternoon will attract some attention in an otherwise uneventful day today. GBP/EUR opens at 1.2601 this morning.
USD: The greenback continued to be range-bound against the cable on Tuesday due to lack of tier-1 data on either side of the pond. The pair continued to trade on cue from the EUR/USD pair which was well supported throughout the day. The greenback lost ground across the board on mixed US economic data. While consumer confidence reading for August slumped, the S&P/Case Shiller home price index jumped 6.9 percent in the second quarter. The impending fiscal cliff also triggered a downgrade warning from rating’s agency Fitch, weakening the greenback further. The UK economic data calendar is light today while the second iteration of US Q2 GDP is due from the other side of Atlantic. However, speculations surrounding Bernanke’s Friday speech at the central banker’s symposium in Jackson Hole, Wyoming is expected to drive the dollar. The GBP/USD pair opens at 1.5813 this morning.
Have a great day!