US holds key to long term trends

US holds key to long term trends

By Sayan Guha.

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

Global equity markets witnessed the year’s biggest jump last Friday on news of unexpected but favourable consensus over key banking and regulatory issues in Brussels. Unfortunately, this Friday the focus will be on US job numbers. The fact that Europe dominates everyday news has made financial markets near immune to EU developments. The expected developments in Europe no longer generate headlines. It’s the unexpected that catches our attention.

It’s nearly impossible for Europe to generate headlines that holds market attention for weeks for markets are acutely aware that for euro to survive, a lengthy and painful political federation is required. Everybody knows that Athens won’t repay its debt, that Madrid’s banks are insolvent, that Europe is in deep recession and that all debtor countries will miss their budget targets. That only event that can shock the markets is the total break up of the common currency. It’s distinct possibility, but may not happen just yet. Till then, Europe will create a lot of volatility, but the new long-term trends will be decided elsewhere.

US hold the key to long term trends. Currently the country is on the cliff, it can either go back to the robust growth it enjoyed in the fall of 2011 and winter of 2012 or can continue to weaken, increasing the chances of a double dip recession. Since post-Lehman recovery, March 10, 2009, the euro has gone nowhere from $1.26 while the MSCI World Equity Index has gained more than 78 percent and the S&P has more than doubled.
In a nutshell, Europe will create a lot of noise, but it’s the US that’ll send the long term financial signals.


GBP/EURO – 1.2448
GBP/US$ – 1.5608
GBP/CHF – 1.4962
GBP/CAN$ – 1.5806
GBP/AUS$ – 1.5204
GBP/ZAR – 12.7014
GBP/JPY – 124.29
GBP/HKD – 12.1013
GBP/NZD – 1.9439
GBP/SEK – 10.7834

EUR: The single currency declined on Wednesday ahead of the ECB’s interest rate decision today. The EUR/USD pair shed as much as a cent after sentiments weakened following a report that showed German services sector shrank last month, indicating a slowdown in Europe’s largest economy. The markets are looking forward to Bank of England’s decision of more asset purchase today while a 25 basis points rate cut by the European Central bank is being widely anticipated. However, what’s not clear is whether Mario Draghi will announce another round of LTRO or will extend purchase of peripheral bonds from the markets. GBP/EUR opens at 1.2442 this morning.

USD: Yesterday’s service PMI growth as a big disappointment as growth in the sector came in at a much lower rate than anticipated. Since the service sector has a disproportionate share in UK’s GDP, the latest reading confirmed that the Bank of England will initiate another round of quantitative easing to prop up the economy. With weak services PMI for June, along with similar construction and manufacturing survey reports earlier this week, that indicates another quarter of UK economic contraction, the cable was sold off to a low of 1.5573 against the greenback. Markets anticipate BoE governor Mervyn King to keep interest rates unchanged at 0.5 percent while the asset purchase program is expected to expand by another £50 billion. The GBP/USD pair opens at 1.5581 this morning.


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