Euro drops to a fresh 3-1/2 year low against the cable

Euro drops to a fresh 3-1/2 year low against the cable

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 28th of May.

As the single currency falls, it is becoming increasingly clear that the markets perceive that the sum of parts in the eurozone is less than the whole. This means that the markets are in favour of the unified euro and are voting against a transition to national currencies. In the contrary, when companies are broken up or demerged, resulting in more nimble and smaller units, share prices generally rise since firms become more competitive. The euro’s inverse equivalence behavior indicates that a disorderly Greek exit will have serious repercussions for the members, including the stronger ones. Yet a broken euro will justify the benefits of cross-border integration since financial ties have become enormously strong and a break-up will be enormous pain.

Following a currency demerger, significant economies of scale will be lost and cross border capital flows will slump. However, national currencies will give governments more flexibility that will probably take the inflation and devaluation route rather than making painful structural changes. The loss of a global currency will also end the euro’s chance of becoming a global reserve currency, replacing the dollar sometime in future.

In hindsight, the euro should have been started after more political and economic integration. The breaking up of the single-currency 14 years after launch will destroy a lot of value and the falling price of euro shows that the market has got it right this time!

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2446
GBP/US$ – 1.5698
GBP/CHF – 1.4971
GBP/CAN$ – 1.6081
GBP/AUS$ – 1.5898
GBP/ZAR – 12.9893
GBP/JPY – 124.61
GBP/HKD – 12.1863
GBP/NZD – 2.0562
GBP/SEK –  11.191

EUR: The euro dropped to a fresh 3-1/2 year low against the cable on Friday and a near two year low against the greenback after ratings agency Standard & Poor’s announced it would downgrade 5 Spanish banks and reports emerging that the President of Catalonia, one of Spain’s most prosperous autonomous regions, requesting for help from Madrid. The EUR/USD pair slipped to 1.2496, a level not seen since July 2010 while the GBP/EUR jumped to a fresh 3-1/2 year high of 1.2530. With the latest developments, the Spanish bond markets came under additional pressure, pushing 10-year yields to 6.34 percent and the spread between German bunds widened to a euro-era high of 4.95 percent.  This shows the real threat of a sovereign contagion spiraling out of control and the enormous challenge lying ahead for EU leaders. The single currency has claimed some of its lost ground overnight following reports that EU leaders are working on a rescue fund for the region’s debt stressed banks and the pro-bailout Greek New Democracy party has surged ahead in the opinion polls. The GBP/USD opens at 1.2465.

USD: The single currency ended lower on Friday, capping the fourth straight week of losses against the greenback as investors sought safe haven US dollars over the single currency.  Meanwhile chances of another round of monetary stimulus are brightening in the UK following some very disappointing economic data. This pushed Sterling lower on Friday against the greenback as investors continued to bet on another round of QE and the GBP/USD pair touched 1.5631 in afternoon trade. The week is likely to start on a quiet note as US traders stay away to observe Memorial Day. The GBP/USD pair opens at 1.5680 this morning.

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