Predicting Euro woes

Following on from last month, and in case you don’t stock pile the newspaper as you should, I will reiterate, or at least pick out the bits that came true: I ended with calling Euro at 1.30 and GBP at 1.50.
Unless you are intimately involved in the newspaper’s production, you may not know that what I write is two weeks old by the time you read it. This leaves me with a bit of a ‘mystic meg’ moment, that of horoscopes, or at least the supposed prediction of the future.
In case you never read ‘mystic meg’, she is the horoscope writer for a UK newspaper publication called ‘The Sun’, perhaps more famously known for page three and something, I’m told, a few of our local bars are well versed in.  If you don’t know what I’m talking about there’s the internet out there; try ‘the sun sam fox’ and see what you get. Just not at work – you have been warned.   Slightly off topic, but having written some of those ‘horoscopes’ during a particularly dull summer, I think I may be qualified.
Back to the currencies, Sterling has taken a pounding on the back of a Hobson’s choice election: keep the incumbent Labour party who have spent and destroyed, or bring in the unknown.
The markets are in fear of a hung parliament which will delay the inevitable, whatever the ‘inevitable’ is.  Markets hate ambiguity. Good news, bad news better to deal and get on with it.
The euro has fallen foul of politics during an election year, Germany unable to commit to an effective bailout of the fiscally irresponsible Greeks – their words not mine, with  voters overwhelmingly in support of a domestic policy for the benefits of Germany, at the expense of…well everyone else.  When the chips are down, the cracks appear and the limitations of a federal Europe without a central economic policy appears even more apparent.
The ‘Greek euro’ apparently having been given the greenlight to apply to the IMF for fiscal support gets ‘local’ governments off the hook of signing up their electorate to bailing out their southern cousins.  All this does is get the icumbent re-elected at the expense of the ‘greater good’ (Hot Fuzz on DVD).  The euro has suffered badly at the cracks in the system. So much for the three musketeer’s motto.
This is short sighted and may come back to haunt them. Germany is a great exporter. Assume the euro continues to slide, exports are cheaper and production is up, how do they slow growth?  The normal course of events would lead to higher interest rates to slow growth and an appreciation of the currency to make exports more costly and therefore slow demand.  Apply this to the euro model without a central fiscal policy and exports continue unchecked by a lack of a raise in interest rates or exchange rates….Germany may find it breaches its own policies.

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited.  The Bank accepts no liability for errors or actions taken on the basis of this information.


Money Markets by Butterfield Bank’s Phil Turnbull