Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 19th of June.
The just concluded G20 meeting is unlikely to change anything, at least in near future. The Germans are likely to insist that greater financial integration must be followed by political integration since nobody gives a credit card without any control over spending.
Both the European borrowers and lenders have valid arguments. Borrowers have rightly pointed out internal devaluation and austerity cannot spur growth, particularly when trading partners are stagnating. However, the counter-examples of Ireland and the Baltic region, where fiscal prudence preceded growth involve either stagnation compared to previously achieved income levels or surging internal demands coupled with buoyant export demand that increased competitiveness and lowered borrowing costs. Borrowers are right to point out that healthy economies will quickly become sick if borrowing costs continue to outrun the growth rate by wide margins.
On the other hand those wary of greater financial integration without political union are right as well. It’s logical to expect that those with deep pockets who stand as guarantors have control over borrowing decisions. This why there is so much discussion going on over Eurobonds and Euro-wide deposit guarantee schemes now since they will most certainly fail unless the current system of I borrow and you repay is rectified.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2446
GBP/US$ – 1.5678
GBP/CHF – 1.4954
GBP/CAN$ – 1.6038
GBP/AUS$ – 1.5485
GBP/ZAR – 13.0285
GBP/JPY – 123.91
GBP/HKD – 12.1696
GBP/NZD – 1.9814
GBP/SEK – 11.0031
EUR: The euphoria over the win of the pro-bailout parties in Greece election proved fleeting with the single currency rallying for a short while as markets turned their attention on the troubled peripheral government bond markets with the Spanish 10-year yield hitting a euro-era high of 7.16 percent. The high borrowing costs for the Iberian nation was not the only factor that weakened the single currency as a report from the Spanish central bank revealed bad debts held by the country’s banks have touched an 18-year high. The EUR/USD pair dropped to 1.2550 in late afternoon trading on Monday while the GBP/EUR pair finished at 1.2461. It will be another interesting day for the single currency as Spain tries to auction EUR 2-3 billion in 12-18 month Treasury bills and markets wait for the latest political developments in Greece. The economic news calendar is light today with the German ZEW survey for June due today. The GBP/EUR opens at 1.2426 this morning.
USD: The cable remained range-bound against the greenback yesterday with the GBP/USD pair sliding in early trade as the Greece elections inspired risk rally waned as markets realised nothing materially has changed about Greece. The pound remained resilient however, continuing its robust performance on Friday. The greenback continued to benefit from its safe-haven status as Greek politicians failed to stitch up a coalition. The greenback is expected to experience strong bids though there is a growing chatter that the Federal Reserve may initiate a fresh round of quantitative easing when the next round of FOMC meeting starts on Wednesday. The economic data on the docket is fairly light today on the other side of the pond with US housing market data due for release. GBP/USD opens at 1.5676 this morning.