Chaotic times for currency markets

29 April, 2015

Robin Haynes

It seems we have hardly had time to stop and take stock of exchange rate movements in recent months, and since the Swiss National Bank removed its cap for the Franc against the Euro in January we have seen the most volatile time for currencies since 2008’s financial crisis. Over the next couple of weeks we will see some key events which have been in the making for some time over this period.

Greek debt resolution – or Grexit?

The Greek debt crisis comes to something of a head in early May. The Euro has been kept cheaper in recent weeks as the Greek government struggles to do a deal with its creditors – and although Greek PM Alexis Tsipras said yesterday that a deal is “close”, Greece’s upcoming repayments of €250m on May 1st and €750m on May 12th are fast approaching, with its negotiators so far failing to satisfy creditors with the scope of its proposed economic reforms. The Greek government has asked ministers to return any spare departmental cash to the central government, and nearly half of international investors in a survey this week think Greece will leave the Eurozone within 5 years; according to Deloitte, the probability of a Greek debt default within 5 years is 90%.

For now this is providing those of you sending money to Italy, France, Portugal and the rest of the Eurozone, improved exchange rates as the single currency stutters amid the uncertainty. If Greece were to default in May, we don’t know whether the Euro would weaken further, or potentially if forcing the issue now instead of a protracted and embarrassing continued public wrangling might actually bring some clarity to financial markets.

UK General Election next week – Boom or Bust?

At home of course we have next week’s General Election to contend with. It seems unlikely that we will have a stable government immediately after polling day next Thursday, but the Pound has been surprisingly resilient to the political deadlock so far. To add fuel to the political debate yesterday, the UK’s first reading of GDP for the first quarter this year showed disappointing growth of 0.3%, down from the 0.6% figure in Q4 2014. The construction sector shrank for the second successive quarter, meaning it is technically in recession, although the GDP figures will be revised in May to give a more accurate picture. All the political parties tried to spin the figures in their favour – but it is clear that the UK might not be out of the economic woods just yet.

The Pound fell after GDP figures were released, particularly against the Euro, but recovered some of its losses in afternoon trading.

Eurozone referendum in 2017?

If the Conservatives form a majority or coalition government, we are likely to see immediate speculation as to the potential effects of a British exit from the EU, should a 2017 referendum deliver that result. EU Commission President Jean-Claude Juncker said yesterday that he wants a “fair deal” for Britain, but was not open to fundamental treaty change, including the freedom of movement within the EU – one item high up on David Cameron’s agenda for his immigration policy. Would a potential British exit from the EU be good or bad for the UK economy and the Pound? Very hard to say at the moment, but markets would be likely to quickly turn their attention to the issue if Mr Cameron is in 10 Downing Street in a week or two’s time – with 2 years of continued speculation and volatility for the Pound likely to follow.

But a quieter day ahead today

It could be the calm before the storm, as there is no major economic data in the UK or indeed Europe today. We do have US GDP at 1.30pm, and the US Dollar has weakened in the last couple of weeks giving much improved rates for buying the American currency. Later we also have interest rate decisions from the Federal Reserve (USA) and Reserve Bank of New Zealand, then two more working days before the long weekend and the final countdown to the election next Thursday.