Are we gearing up for Eurozone Armaggedon?

Are we gearing up for Eurozone Armaggedon?

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 17th of May.

There is much speculation about Greece’s imminent exit. Chancellor Angela Merkel may find it hard to explain to the Germans why more money should be given to the austerity-resistant Greeks. Greek banks are running out of collaterals since they hold mostly low quality assets with 50 percent or more haircuts while the ECB, though suspending routine operations with certain banks, has kept the Emergency Liquidity Assistance channel open.

The Germans taxpayers are angry over the Bundesbank buying ‘junk collaterals’ from the Club Med debtors. However, they will blink when it comes to biting the bullet, delivering a Marshall-Plan style package to keep Greece in the Europe. The reason is simple. No economist understands the outcome of a euro breakup and the following contagion effect. There is no precedence of breaking up a shared currency before. Flight of capital may be spectacular for peripheral countries and truckloads of Italian euro may end up in German banks while Spanish deposits may find their way into French banks. A full-scale run on the bank may happen in a matter of hours, blowing up the best laid plans.

The Greek society will collapse as a hastily introduced Drachma will be worth anything, pushing streams of refugees across borders. Worst still, the Germans and the EU, EC and the ECB will get the blame for it. It will be foolhardy to believe that Greeks will accept austerity measures that trim the GDP 7 percent annually or pushes youth unemployment rate to 50 percent. However, instead of supplying money to the banks, a bailout package that is approximately equal to 10 percent of Greece’s GDP to reflate the economy in a Marshal Style bailout plan will buy the EU leaders some time. Though this is not a long-term cure, it’ll prevent an immediate full-blown crisis. Meanwhile the long-term plans can be put into action behind the scenes as other peripheral states including Portugal, Spain and Italy get their house in order. When the Greece Marshall plan happens, you can expect the markets to rally!


GBP/EURO – 1.2491
GBP/US$ – 1.5902
GBP/CHF – 1.5006
GBP/CAN$ – 1.6087
GBP/AUS$ – 1.5990
GBP/ZAR – 13.161
GBP/JPY – 127.75
GBP/HKD – 12.3548
GBP/NZD – 2.0748
GBP/SEK – 11.361

EUR: The single currency remained range-bound yesterday though it managed to claw back some of its previous losses in a choppy trading session. Greece continued to hog the limelight as the European Central Bank announced it was suspending lending to come of the banks to limit exposure. This spiked the 10-year yields of Spanish and Italian bonds to 6.5 percent and 6.1 percent respectively, levels not seen for months. The GBP/EUR slipped from its 3-1/2 year high on Wednesday after a dovish Bank of England inflation report raised further monetary stimulus prospects. However, with Greece re-elections scheduled for next month, the cable is likely to scale new highs as uncertainties prevail. Spain continues to reel under Greece contagion fears with its equity index the IBEX tumbling to a fresh 9-year low. The GBP/EUR pair opens at 1.2494 this morning.

USD: The cable slipped against the greenback yesterday with the GBP/USD pair hitting a four week low of 1.5889 after the BoE inflation report hinted at further QE measures in the wake of recent troubles in Europe. The near-term inflation target was revised upward while growth forecasts were downgraded. However, the unemployment rate dropped to 8.2 percent from 8.3% in the previous month, raising hopes for an early recovery for the labour market. The USD eased after the April FOMC minutes showed the Fed may restart QE3 after Operation Twist comes to an end in June to ensure that growth momentum is not lost. We don’t have much economic news from the UK though the economic data calendar from the other side of the Atlantic is heavy today with Philadelphia Fed and initial jobless claims to look forward to. The GBP/USD pair opens at 1.5902 this morning.


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