Portuguese Bond Sale and Chinese Data Lifts Risk Sentiment

On Wednesday risk sentiment was lifted by a successful Portuguese bind sale and strong global economic data suggesting recovery is well under way. A strong increase in Chinese exports lifted the high yielding Aussie dollar. Australia is a chief supplier of raw materials to China. The Portuguese government which had intended to sell EUR750 million in long term bonds sold EUR990 million worth of bonds easing investor fears of stressed Portuguese government finances. Investors have been fearful of the Greek fiscal crisis spreading to other Euro Zone nations. The successful bond sale helped to lift the troubled euro in currency markets. The euro rose to a two week high against the yen. Most analysts believe the euro will remain under some pressure until some euro zone nations implement austerity measures.

Chinese Exports Increase

Risk sentiment was broadly lifted after February’s Chinese export figures showed an increase of 45.7% over February 2009. The Chinese figures boosted commodity linked currencies such as the Aussie and Kiwi dollars. The rise in risk appetite put the yen under pressure as investors sought higher yielding currencies and assets. Greg Anderson of Societe Generale SA in New York stated, “There is a firm underpinning to the global economic recovery. The yen normally weakens when stocks go up and has been reluctant to do so the last few weeks. Now it’s playing catch-up.” The yen fell against the euro trading at 123.60 per euro and against the dollar the euro gained 0.3% trading at $1.3646.. The Kiwi dollar and the Norwegian Krone were big winners against the dollar as crude oil traded above $80 a barrel and global stocks rose. Some traders expect commodity linked currencies to continue to perform well in international currency markets. Lee Hardman of Bank of Tokyo Mitsubishi UFJ Ltd said, “Conditions will continue to improve on the risk-sentiment front, and the emerging-market currencies and commodity-linked currencies are likely to outperform over the coming weeks.”

Worst of Greek Crisis is Over Says EU Official

In an encouraging statement former European Commission President Romano Prodi said in an interview in Shanghai that the worst of the Greek fiscal crisis is over and should not spread to other EU nations. Prodi stated, “I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.” Andrew Wilkinson of Interactive Brokers Group LLC credited Prodi’s statements for the Euro’s gains. Wilkinson stated, “The words of Prodi are driving the euro higher. Rising German yields tell us that there are fewer concerned investors and risk appetite is back.”

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Yen Gains on Risk Aversion

The Japanese yen gained broadly on a rise in risk aversion and Japanese repatriation. Risk aversion has taken a big hit on concerns that several euro zone nations may face similar debt problems as the current Greek crisis. Last week risk sentiment had been lifted by US data showing better than expected US employment figures even as the US faces the worse unemployment rates since the post World War Two era. The change in risk appetite came after Fitch’s rating service expressed concerns that Portugal’s austerity measures may not be enough to avoid a similar crisis to that taking place in Greece. The US dollar gained after China said it would continue to buy US treasuries. Camilla Sutton of Scotia Capital stated, “The combination of today’s risk-averse trading and repatriation of yen have been the key drivers over the last 12 hours.”

BOJ May Ease Monetary Policy

Some analysts believe the yen’s gains may be limited if the Bank of Japan eases monetary policy. The Japanese Nikkei newspaper reported that the Bank of Japan is exploring the possibility of monetary easing and will decide at their meeting on March 16-17. High yielders like the Aussie dollar also traded down against the yen. China, which is the largest holder of foreign reserves said it is committed to the continued purchase of US treasuries and at the same time said the nation will increase its gold holdings. Kathy Lien of GFT said, “If China is not diversifying their reserves into gold, then there is no realistic alternative to absorb their demand outside of U.S. dollars.”

Greece’s Problems May Spread Says Ratings Agency

Greece continues to be a drag on the Euro and Greek Finance Minister George Papaconstantinou said that Greece is taking steps to get its deficit under control and said the matter is European. Some traders fear that Greece’s problems could spread to other EU nations. On Tuesday Fitch Ratings said that its outlook for Portugal’s AA rating is negative. In a note Forex.com currency analysts said, “Even though Fitch also stated that the contagion risk to Portugal and Spain from Greece is not great, there are sufficient worries in the market concerning EMU to keep the euro “on the back foot.”

Pound Under Pressure

The pound dropped to a one week low against the US dollar after Fitch’s rating service said that the UK’s sovereign credit profile is deteriorating. A Moody’s Investor Service report said that the UK faces difficult decisions on when and how to withdraw support for the nation’s banking sector.

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Pound Falls on Political Concerns

The British pound fell for the sixth straight day against the dollar on investor concerns that British voters may fail to elect a government capable of cutting the nation’s rising deficit.  Recent polls showed declining support for the Conservative party putting the UK on track for its first minority government since 1974. Jeremy Stretch of Rabobank International in London stated, “New U.K. opinion polls are re-emphasizing the political dynamic, which is a sterling negative. Investors will prefer the safer haven of the dollar in this type of environment.”  Recent polls showed the conservative lead at 2 percentage points suggesting that Prime Minister Gordon Brown’s Labour Party will most likely retain power. Brown’s Labour government is selling record amounts of debt to finance various stimulus programs which were introduced to help the UK economy recover from the deepest recession since World War Two. Last December the UK increased gilt sales Hans-Guenter Redeker of BNP Paribas SA told Bloomberg television, “It looks like we might have a government which is not going to be driven by a broader majority, and under those circumstances, the possibility of having a successful and decisive budget consolidation is very slim.” Some experts are predicting that the pound could fall as low as $1.20 and possibly reach parity with the euro.

Greece to Announce More Cuts

Currency markets have been paying very close attention to the ongoing Greek fiscal crisis and on Tuesday the euro rose slightly against the US dollar after the Athens government said it will announce new austerity measures and debt cuts on Wednesday. The euro rose 0.2% to $1.3588 and against the pound gained 0.3% trading at 90.74. Dean Popplewell of Oanda Corp said, “The euro spiked up on the news from Greece. Greece is basically having to appease the European Union and the euro is very much holding its own.” The Athens government bowing to pressure from the EU and investors is expected to announce 4.8 billion euros ($6.5 billion USD) in budget cuts tomorrow.

EU Insists on Further Austerity Measures

EU Monetary Affairs Commissioner Olli Rehn said that the Athens government must announce new austerity measures “in the coming days” as some EU officials believe that current measures are not enough to lower the nation’s massive deficits. The announcement would come in advance of a meeting between German Chancellor Angela Merkel and Greek Prime Minister George Papandreou. The measures could help Merkel overcome widespread public and political opposition to aiding Greece. In a note to clients Norbert Aul of Commerzbank AG said, “Developments surrounding Greece are still driving the European government bond markets. The market seems to still believe that help for Greece might be around the corner.”

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