Good morning and welcome to today’s foreign exchange market commentary on Friday, the 9th of November.
Critics have been ranting after Democrats managed to secure a second term arguing European social democracy chosen by American people undermines the spirit of free markets and limited government. But President Obama’s reelection has some silver linings.
The Democrats’ understanding of monetary policy is much superior to the Republicans. It’s a well known fact that the Republicans are firm critics of quantitative easing and bitterly opposed the reappointment of Fed Chairman Ben Bernanke. America is unlikely to rectify its debt trajectory if it follows Europe-style deflation. But the GOP, being hard monetarists who are fond of the gold-standard, precisely aimed to achieve that. Growth is the only way forward to balance the budget and improve the denominator of the Debt/GDP ratio. Obama should retain Bernanke after the Fed chairman’s current term ends.
Also the Budget Control Act of 2011 states that if Congress failed to implement the Simpson-Bowles fiscal plan for consolidation, automatic expense appropriation will come into effect. Additionally, if the deal on Bush era tax-cuts that are set to expire in 2013 is taken into consideration, we have the combination of automatic tax hikes and withdrawal of tax-cuts in about two months from now, popularly known as the fiscal cliff, unless the Congress reaches a compromise.
The public debt to GDP ratio has gone up from below 40 percent in 2007 to nearly 80 percent today. The massive deficits built over the past five years are neither sustainable nor prudent. Inability to contain the deficits has already cost the US its AAA rating. The only way to enforce fiscal discipline is probably to jump off the fiscal cliff, which suddenly looks possible following Obama’s win. The Congressional Budget Office forecasts mild recession in 2013, followed by return-to-growth. That should be a small price for limiting future deficits, cutting deficit in half to bring down the debt GDP ratio over the next decade, and laying the foundation for future prosperity.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2522
GBP/US$ – 1.5978
GBP/CHF – 1.5106
GBP/CAN$ – 1.5965
GBP/AUS$ – 1.5332
GBP/ZAR – 13.8826
GBP/JPY – 127.03
GBP/HKD – 12.3889
GBP/NZD – 1.9561
GBP/SEK – 10.6792
EUR: The single-currency traded lower against the US dollar yesterday with the EUR/USD pair falling to 1.2725 as risk appetite diminished. The decline came on the heels of a report that suggested the decision on the next tranche of bailout money will not taken before the end of this month and not next week, as many had expected. The ECB also kept its interest rates unchanged at 0.75 percent for a month while ECB President Mario Draghi said the central bank stands ready to buy sovereign bonds if requested. Cable pushed higher against the euro yesterday after the Bank of England decided to keep interest rates on hold while keeping its QE program unchanged at GBP 375 billion. The GBP/EUR pair has eased over the past 24 hours to open at 1.2531 this morning.
USD: Sterling dropped to 1.5930 against the greenback as risk remained off the table, but managed to regain some lost ground by midday following BoE’s decision to keep its assets purchase program unchanged at EUR 375 billion. The GBP/USD pair touched the 1.6000 level briefly but failed to hold on to the gains. Risk sentiments however improved overnight, helped in part by better than expected Chinese retail sales and industrial production data. An improved US trade deficit data and lower-than-expected weekly unemployment benefit claims reading added to the overall positive mood. The GBP/USD pair opens at 1.5985 this morning.
Have a great weekend!