Olivier Blanchard, IMF: ‘Damned if you do and damned if you don’t’

Olivier Blanchard, IMF: ‘Damned if you do and damned if you don’t’

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 16th of April.

A debate is raging across Europe over the path ahead – the puzzle of growth versus austerity to bypass the sovereign debt crisis. As Europe comes closer to a double-dip recession in less than three years, the debate gets louder. Some expert’s argue that swift action on jobs and taxes – a ‘growth compact’ rather than a fiscal one, would take the region out of the second slowdown. They argue that by cutting expenditures, the peripheral states will aggravate contraction and push up unemployment, making it harder for the countries to borrow from markets.

The austerity camp however says that it’s important to cut spending to ensure public finances become sustainable, thus strengthening market confidence. Both sides agree that structural reforms are a necessity to boost growth and emphasize on flexible labor laws in the mid-term, but differ on the pace of debt reduction.

The growth brigade says Europe should reduce deficits incrementally and cut spending at a lower pace lest it depresses revenues further, meaning the peripheral states will miss their fiscal targets again.

The debt scourges argue that countries achieve most of deficit reduction by cutting spending rather than raising taxes. The conundrum was summed up by Olivier Blanchard, chief economist of IMF: ‘damned if you do and damned if you don’t.’

CURRENCY RATES OVERVIEW 

GBP/EURO – 1.2158
GBP/US$ – 1.5821
GBP/CHF – 1.4623
GBP/CAN$ – 1.5836
GBP/AUS$ – 1.5327
GBP/ZAR – 12.676
GBP/JPY – 127.412
GBP/HKD – 12.2752
GBP/NZD – 1.9312
GBP/SEK –  10.8170

EUR: The single currency remained under pressure on Friday as the Spain’s Credit Default Swaps rose to an all-time high. Borrowing cost shot up towards the 6 percent mark as ECB member Knot threw cold water over hopes of the central bank restarting the peripheral countries’ bond buying programme. The EUR/USD finished the day at around 1.3070, well off the day’s high of 1.3184 in early trading. The GBP/EUR pair ended at 1.2154 on Friday, the cable’s highest level in nearly three months. Sterling may get further support after inflation data comes out tomorrow. The GBP/EUR pair opens 1.2165 this morning.

USD: The greenback gained across the board on Friday as the debt crisis spurred demand for dollar-denominated assets. There was not much in the way of market moving data on Friday except US consumer confidence dropping a shade and inflation numbers coming slightly higher than expected. The cable ended the week at 1.5840 as March output prices data from the UK failed to make any impact as did the S&P’s reaffirmation of AAA rating of the British economy. There’s no economic data expected from the UK and the GBP/USD pair may remain range-bound today. The pair opens at 1.5838 this morning.

 

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