The malfunctioning global economy

The malfunctioning global economy

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 4th of February.

The US nonfarm payroll reading for December barely gave a reason to cheer about. Unemployment rate ticked up 0.1 percent in December to 7.9 percent for the world’s largest economy. The picture is equally gloomy across the Atlantic. Europe has slipped into recession without ever really recovering while Britain is looking down the barrel for a triple-dip recession.

Industrial nations have been suffering malfunctioning economies, followed by high unemployment rates at least since 1825 when financial panic nearly brought down the Bank of England. For the last two centuries, we have been trying to figure out how to deal with financial crises that cost workers their jobs and investors their profits and cause the failure of central banks and governments.

What is holding authorities back to restore full employment? Is it the fear of inflation that policymakers don’t know how to control while boosting the flow of expenditures in the real economy? Since one person’s spending is another’s income, if everybody tries to reduce spending below income, or tries ‘de-leveraging’ as they say, high unemployment and depression will follow. If the private sector decides to push ahead with de-leveraging their balance sheets, governments should step in, borrow money and spend to rebalance the economy.

There are many ways in how this can be achieved by governments and central banks. And indeed some steps have been taken by central banks and governments in the North Atlantic region. But none have taken expansionary policy steps on a large enough scale to restore full employment for the fear of spiking long-term interest rates and accelerating inflation.

Modern policymakers, so eager to draw the line under accommodative measures, should learn from the mistakes of the ‘30s. John Maynard Keynes had begged the policymakers of his time to disregard the austere souls arguing he fails to understand how universal spending cuts can bring us closer to prosperity. May be we should introspect now to avoid repetition of history.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.1528
GBP/US$ – 1.5702
GBP/CHF – 1.4282
GBP/CAN$ – 1.5662
GBP/AUS$ – 1.5084
GBP/ZAR – 13.9258
GBP/JPY – 145.76
GBP/HKD – 12.1845
GBP/NZD – 1.8579
GBP/SEK – 9.90961

EUR: The shared currency marched ahead on Friday, hitting a high of 1.37 against the dollar and 1.150 against the pound at one stage as demand for the 17-member common currency gathered steam. Despite the region’s underlying fundamentals painting a different picture, considerable diversification by traders and investors have eroded the status of the pound’s safe haven status. With only limited mid-market data due for release this week, the euro rally looks set to continue for now although the sheer pace of the rise increases the likelihood of a near-term correction. That being said, the ECB’s Thursday policy meeting and the accompanying press-meeting will influence the direction to future trends.

USD

: The Pound’s initial rally on Friday quickly faded after heavy weekend selling by traders in the late-European session. Reaction to the weak but key manufacturing PMI was muted in the beginning, but soon worries of triple-dip recession came to the fore. A strong US ISM manufacturing number pushed the cable almost 200 pips to test under the 1.57 level, giving away nearly all of the week’s gain along the way. With relatively fewer releases due from the US that includes service PMI and the trade balance data, focus is likely to remain on UK data this week, starting with January construction this morning. Any weakness and sterling will likely slide further although the week’s big release remains the BoE’s monthly rate meeting on Thursday. The GBP/USD pair is currently a little above the 1.57 mark.

Have a great day!

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