Posted on 14 April 2010
Increased Confidence for US Recovery
During the recent recession the US dollar has largely traded on risk appetite and aversion. When the news was bad the dollar usually gained due to its status as a safe haven currency. Recently it appears that the link between the dollar and risk assets such as stocks and commodities is weakening. This will allow the dollar to benefit from favorable US economic data. The weakening of the link between the dollar and risk assets means increased investor confidence in US economic recovery and the perception that the Federal Reserve will be the first to raise rates. During the past year positive US economic data has usually led to dollar selling in favor of riskier assets. Bad economic news has usually prompted investors to seek the safe haven offered by the dollar and the Japanese yen.
Dollar Trading on Fundamentals
The relationship between the dollar and risk is rapidly changing. Last Friday’s US jobs report caused the dollar to gain and speculation that the Fed will raise rates to increase. Marc Chandler of Brown Brothers Harriman stated, “Our hypothesis is that the risk-on/risk-off matrix that seemed to dominate market development during much of the crisis is breaking down,. We suspect it is being replaced by a greater emphasis on country specific macro-economic developments.” Reuters News Agency reported that the correlation between the S&P 500 index and the dollar Index has fallen to zero during the past month and reflects a new dynamic where the dollar can gain independent of changes in risk appetite or aversion.
Euro Sentiment Remains Negative
The change in the dollar’s dynamics is taking place as the Euro Zone suffers from the Greek debt crisis. Although last weekend’s teleconference of EU finance ministers caused a slight euro rally most investors remain euro negative. Japan’s flat economy has pressured the Bank of Japan to keep its loose monetary policies. Phyllis Reed of Kleinwort Benson stated, “We’ve seen the U.S. economy continue to recover and it looks probably the most healthy economy in the developed world and that’s helping to support the dollar. We have problems everywhere else.” Historically the dollar and commodities have a negative relationship and a weak dollar creates demand for dollar denominated assets. For months investors have speculated about a Fed rate hike but the Fed has repeatedly said that rates will remain low for an ‘extended period.’ Many investors believe that if US recovery continues at its present pace the Fed will raise rates sooner than expected. Swiss bank “We’ve seen the U.S. economy continue to recover and it looks probably the most healthy economy in the developed world and that’s helping to support the dollar. We have problems everywhere else,” said in a client note, “The dollar may be in a bit of a holding pattern near-term, not declining materially on increased risk sentiment as better economic data will support a Fed rate hike. And not strengthening materially either until more certainty in the timing of the initial Fed rate hike emerges.”
Posted on 11 April 2010
Fitch’s Downgrades Greece
The euro fell near an eleven month low against the US dollar last week as increasing yields on Greek debt prompted speculation among investors that Greece may turn to the EU for help or would possibly default. Greece received another blow from Fitch’s ratings agency which downgraded Greece to BBB-, just above ‘junk’ status. Fitch’s outlook for Greece remains negative. The euro trimmed some of last week’s losses after the EU said it stands ready to help the troubled Athens government. Richard Franulovich of Westpac Banking Corp stated, “The market had no confidence in Greece and thought default was imminent.” The premium investors are demanding to purchase Greek 10 year bonds vs. German bunds rose as high as 442 basis points which is the highest level since the euro was launched in 1999. Greek Prime Minister George Papandreou said that borrowing at current rates is unsustainable. Many believe that intervention is unavoidable. UBS AG Chief European Economist Stephane Deo said, “The recent market action means that an external intervention may be unavoidable and could happen very soon as the situation is untenable.”
Long Term Problems For Euro
On Friday European Union officials said they are ready to help Greece if necessary. EU officials in Brussels are sorting out the details of the earlier EU/IMF agreement. Some fear that the possibility of a Greek bailout will cause investors to steer clear of holding the debt of other troubled EU nations which will pressure the euro further. Win Thin of Brown Brothers Harriman & Co stated, “Bailing out Greece would take some near-term pressure off the euro, but longer term it’s not the end of it. One thing we don’t know is the amount of contagion risk. As we’ve seen in emerging-market crises, it rarely stops at one country. There’s Portugal, Spain — all these other countries in the same queue as Greece.”
EU Finance Ministers to Hold Teleconference Sunday
On Sunday Euro zone finance ministers will hold talks to discuss the details of how a safety net for Greece will work. A lack of clarity in the earlier EU/IMF agreement has caused investor uncertainty. Recently Greece’s Prime Minister said the Athens government will use the safety net if necessary. In addition to the finance ministers the European Central Bank and the European Commission will also participate in the talks. Greek Prime Minister George Papandreou was quoted as saying, “The question remains whether this mechanism will convince markets just as a gun on the table. If it does not convince them, it is a mechanism that is there to be used.” The effects of the talks will likely influence Monday’s trading.
Posted on 08 April 2010
Euro at Two Week Low vs. Dollar
The euro traded near a two week low vs. the dollar even after European Central Bank President Jean- Claude Trichet said that default would “not an issue” for Greece. The euro had made slight gains earlier after Greece reported that the nation’s first quarter deficit fell. Vassili Serebriakov of Wells Fargo & Co. in New York stated, “Comments from Trichet had an impact on the euro. While the situation in Greece is not getting much better, I don’t see much scope for it to get worse. We’re seeing no immediate reasons for a break to the downside.” Trichet said that Greece will not default and will not need aid from the EU. The ECB left rates at 1%. The already troubled euro has been pressured by a news report that said the Athens government wanted to renegotiate last month’s EU IMF agreement.
Bond Spreads Pressure Greece
The Athens government denied the report and Tuesday the spread between Greek and German bonds was in excess of 4%, the largest since the Euro’s launch. Euro sentiment was further damaged after a news report that said that Greek banks have asked permission to access funds from a Greek aid package agreed to in 2008. Stuart Bennett of Credit Agricole said, “Renewed uncertainty over Greece is hurting an already jittery euro. Even though the market is already heavily short of euro, there is still downside risk.”Greek debt concerns and concerns that the crisis could spread to other EU nations have caused the euro to decline about 10% from January’s high of $1.4582. Also damaging the euro is a dearth of details about last month’s EU IMF agreement. Fitch rating agency senior Greece analyst Chris Pryce said that the Greek government’s only choice is to ask for help. Pryce stated, “Despite everything the EU and the euro zone have done there is still a lack of clarity (and) confusion about what they intend to do, when they intend do it and how much would be involved, It is now up to the Greek government to go publicly to the EU and IMF and ask for the cash and the support.”
Greece Prefers Market Based Solutions
The Athens government has promised to cut Greece’s debt to 8.7% of Gross Domestic Product this year but remains cautious that budget cuts could spark social unrest. Greece has been plagued by strikes, protests and riots since last year. At the present time the Athens government says it prefers to borrow from markets and will use the EU IMF agreement as a last resort. Government spokesman George Petalotis stated, “For the time being it is not necessary to activate the aid mechanism. The EU/IMF safety net is there to guarantee that Greece is not alone.”
Posted on 03 April 2010
Japanese Investors Seek High Yielding Assets and Currencies
The US dollar has hit a seven month high vs. the Japanese yen after Japanese investors moved funds abroad to higher yielding assets. The dollar also gained against the euro in advance of a US jobs report which is expected to show that US employers added 160,000 jobs in March. Some believe the strong jobs data could prompt the Federal Reserve to raise rates although Fed officials have repeatedly said that rates will remain low for an “extended period.” The US jobs report will be released Friday, April 2nd. Europe and Asia posted strong manufacturing data lifting risk appetite in equity and currency markets. Matthew Strauss of RBC Capital Markets stated, “We had a slew of nice upside surprises from manufacturing data in China, Europe, the UK … so that’s a good start to the month, and if we get a good payrolls number tomorrow, that’s a dollar-positive.”The dollar gained 0.3% against the yen trading at 93.74 yen. The euro slipped 0.2% vs. the dollar to $1.3489.
Euro Pressured Despite EU, IMF Agreement
Concerns about Greece’s debt crisis linger even after last week’s agreement by the EU and the IMF to provide the debt ridden nation with a safety net. The plan has failed to reduce borrowing costs for the Athens government. Increased borrowing costs mean that the EU leaders may have to implement the rescue mechanism the details of which remain unclear. Such a move would force EU leaders to decide what role the International Monetary Fund would play in any Greek aid package. The move would also put German Chancellor Angela Merkel in a difficult political position in Germany where opposition to any taxpayer funded bailout of Greece is widespread. Phyllis Reed of Kleinwort Benson stated, “What they were hoping for was to set up some sort of arrangement that never has to be used. The markets have sniffed that out and it seems like we’re heading back to square one.”
Many Pessimistic About Greece’s Prospects
The rescue mechanism which is a combination of EU and IMF bilateral loans can only be triggered if the Athens government runs out of funding options. Greek Prime Minister George Papandreou must raise about 11.6 billion Euros by May’s end said the agreement was “very satisfying.” Many remain pessimistic about Greece’s prospects. Razeen Sally of the London School of Economics said, “Markets don’t believe that Greece will be able to see things through.” Trading will likely be thin in advance of the weekend Easter holiday.
Posted on 31 March 2010
Euro Holds Gains
The euro held gains on Tuesday as risk sentiment was bolstered by the perception that Greece will be able to raise money via financial markets. Greece’s debt management agency reported that it sold 5 billion Euros ($6.72 billion USD) of seven year bonds at 5.9% twice what Germany pays for similar bonds. Despite the euro’s recent gains analysts see very limited euro potential because of euro zone debt concerns and slow euro zone growth and also think euro gains will be short lived. John Horner of Deutsche Bank stated, “This appears to be a short term reprieve for the euro. Apart from the festering debt-related problems, I think some strong U.S. data later this week could also give a lift to the U.S. dollar.” Investors remain optimistic about the US economy and Friday’s jobs report is expected to show that US employers added 190,000 jobs in March.
US Consumer Spending Up For Fifth Straight Month
A us government report issued Monday showed that US consumer spending rose for the fifth straight month. Most experts do not believe the Federal Reserve will raise rates until the second half of 2010 and most experts believe US rates will rise faster than those in Japan or Europe. The Japanese yen fell against most major currencies and hit an eight week low vs. the euro as signs of global recovery emerge paring demand for the safe haven of the yen. The yen hit its biggest monthly vs. the euro in advance of a Japanese report that is expected to show increasing manufacturer confidence. Sebastien Galy of BNP Paribas SA stated, “There’s a tremendous amount of pressure to push the yen lower in the next few days. The market is expecting Japanese institutional investors to be chasing steepness in yield curves globally in relatively safe places.” The yen fell 1.5% against the euro trading at 126.27 per euro and fell 0.8% vs. the US dollar to 93.47 per dollar. The euro gained 0.7% against the greenback to trade at $1.3510.
Japanese Fiscal Year Ends
The yen has posted a 4% monthly loss vs. the euro. The yen suffered accelerating losses as traders placed new bets on a weak yen. The Japanese fiscal year ended today. Investors also speculated that Japanese companies are finished repatriating funds. Lee Hardman of Bank of Tokyo-Mitsubishi UFJ Ltd said, “The fear was that heading into this fiscal year-end there would have be a significant potential for a pickup in repatriation of earnings back to Japan. If those flows have materialized, it’s had very little supportive impact on the yen.”
Posted on 30 March 2010
EU IMF Deal Gives Greece Little Respite
The EU IMF deal reached at last week’s EU summit gave debt ridden Greece little respite from high borrowing costs and exposed weakness in the EU. Greece will test financial markets with a 5 billion euro ($6.72 billion USD) bond issue. The bond issue fell short of previous Greek bond issues due to thin pre Easter trading and shorter bond maturity. The bond has a coupon of 5.9% which is twice of what Germany pays on a 7 year bond. Greece has been struggling with high borrowing costs which are making it difficult for the Athens government to finance its debts. Most analysts say that borrowing costs would be higher if last week’s agreement had not been reached. Despite the opaque agreement Fitch said its outlook on Greece remains negative. In a statement Fitch’s said “The (euro zone) statement was positive for Greece’ credit profile by enhancing its near-term financing options and flexibility as well as reaffirming the support of euro area member states for economic and fiscal reform in Greece. Nonetheless, the rating outlook remains negative because of continued uncertainty over the medium-term economic and fiscal adjustment, as well as the continuing lack of clarity over the fiscal financing strategy.”
Euro Zone Debt a Concern
Debt remains a concern throughout the euro zone. Many experts remain concerned about other eu nations in similar straits including Portugal, Italy, Ireland, and Spain.The euro zone’s fourth largest economy, Spain, could face a similar crisis soon. Unemployment in Spain is currently above 20% and Spain’s deficit accounts for 9% of the nation’s GDP. Many economists say that a crisis in Spain similar to the one in Greece could have a more devastating effect on the euro. Economist Simon Tilford of the Centre for European Reform stated; “Any economy regarded as having poor growth prospects is going to struggle to borrow at affordable levels.” Some experts warn that a breakup of the EU is possible. In some quarters the idea of forming a new currency bloc is gaining ground. The new currency bloc would be formed by Germany and northern European nations.
US Jobs Report Due Friday
Investors are waiting for Friday’s US Non Farm Payrolls report which is expected to show increased job growth in the US. The report is expected to show that US employers added 190,000 jobs this month. This would be the second time US employment figures have increased since the recession began in December 2007. Most currency experts expect the dollar hold recent gains.
Posted on 28 March 2010
IMF to Call For European Reforms
The US dollar gained on the euro and is now on track for its largest quarterly gain vs. the multi nation currency since 2008. The euro is still struggling in currency markets as European leaders try to find a solution for Greece’s debt crisis. The dollar gained 0.9% against the euro trading at $1.3410. On Friday the euro gained slightly as EU leaders agreed to provide loans to Greece with IMF aid. The IMF remains unsure of what its role will be in providing financial aid to Greece. The IMF said it was monitoring events in Greece closely. In a statement the IMF said, “We are following developments closely. And as we have said earlier, the Fund always stands ready to consider a request from a member country for our financial assistance.” The IMF’s website said that IMF Managing Director Dominique Strauss-Kahn will most likely call for closer cooperation and European economic reforms. The IMF is facing a dilemma since Greece falls under EU rules and monetary and exchange policies are set by the European Central Bank making it difficult for the IMF to set conditions for aid to Greece.
Merkel Imposes Tough Conditions
Under the EU agreement Greece will receive bilateral loans from other euro zone countries and the IMF may intervene should Greece face severe problems. An unnamed IMF source told the Reuters news agency that Greece is not expected to seek IMF aid anytime soon. Tough conditions imposed by German Chancellor Angela Merkel mean that loan mechanisms could only be activated by severe economic conditions. It remains unclear what conditions Greece could activate the EU loan mechanism and when Greece could seek IMF aid. Last Thursday Greek Finance Minister George Papaconstantinou said that Greece would prefer to acquire finding through financial markets. Many analysts have said that Greece may be allowed to borrow between 20 billion to 22 billion Euros from the IMF.
IMF Role Unclear
Former World Bank official and a Washington-based Carnegie Endowment for International Peace Uri Dadush said it was unclear who would lead intervention. Dadush stated, “While I greatly welcome the IMF’s involvement as a big step forward nevertheless the agreement as outlined has enormous ambiguity and therefore is unlikely to have the desired effect on the market.”He also said that since the ECB sets monetary policy for the euro zone the IMF may have to be aggressive on fiscal and structural reforms. The IMF may question European policies making some EU members uneasy. Dadush said, “In another context countries would welcome this with open arms, but what this is in effect is a new, somewhat unpredictable element for the euro zone”
Posted on 25 March 2010
EU Agrees on Rescue Plan for Greece
Breaking news reports have indicated that France and Germany have come to an agreement on a rescue plan for financially troubled Greece. The proposed safety net would total about 22 billion euros. ($29,230,116,554 USD) The net would only apply if Greece is unable to borrow. EU nations would provide bilateral loans and would also include “substantial” IMF loans. A majority of the funding would be European. A draft of the rescue plan says the Athens government “has not requested any financial support” and also says that “no decision has been taken to activate” to activate the rescue plan. Other breaking reports indicate a wider agreement among EU nations on a rescue plan for Greece. Greek government spokesman George Petalotis said that several EU countries have agreed on a rescue plan for Greece. Petalotis told reporters, “The plan meets our requirements fully … we agree. There is a very good plan which will be announced shortly. We consider it to be a message of stability and it will have a positive impact on the Greek economy.” When asked if EU nations were ready to sign the proposed agreement Petalotis stated, “Yes, they have agreed.” He also said that French President Nicolas Sarkozy, German Chancellor Angela Merkel, European Central Bank President Jean-Claude Trichet, Greek Prime Minister George Papandreou and EU president Herman Van Rompuy have met to sort through the details of the agreement.
ECB to Loosen Collateral Rules
Reports indicate that the European Central Bank is ready to loosen collateral rules to help Greece to reduce its debt. A French spokesperson said that President Nicolas Sarkozy and German Chancellor Angela Merkel had met in private and agreed on “a text … which describes very precisely the conditions on which euro zone countries could be called upon to intervene.” Under the proposed agreement EU nations would provide a majority of the funding with strict conditions set by the European Commission and the European Central Bank and the IMF would provide money and its considerable expertise. Diplomats said that EU leaders may hold additional meetings on Thursday to discuss Greek aid.
Greek Crisis to Dominate EU Summit
Officially the EU summit is supposed to be officially concerned with the EU’s 10 year economic strategy and global warming agreements but most observers expect the Greek fiscal crisis to dominate the talks. The agreement puts German Chancellor Merkel in a difficult political position. Taxpayers in Germany are fiercely opposed to aiding Greece which has public debts of 12.7% of GDP-more than four times what is allowed by EU regulations.
Posted on 20 March 2010
UK Recovery Stalled
Concerns about the pace of recovery in the UK have pressured the pound in recent trading sessions. Bank of England policy maker Andrew Sentence said that the UK may return to recession conditions prompting speculation that BOE rates will remain at record lows. Sentence told reporters that there is “some risk of a double-dip recession” and that the UK will need “substantial” tightening. BOE policy makers left rates at 0.5% and voted to keep the central banks’ bond purchase program at 200 billion pounds. ($303 billion USD) Neil Jones of Mizuho Corporate Bank Ltd stated, “Sentance’s comments are going to be a driver. They are a reminder to foreign-exchange markets that it’s not going to be a smooth ride to recovery for the U.K. The BOE remains on the dovish side and there’s no risk of them raising rates. That should keep sterling on the backburner.” On Friday the pound fell 1.5% vs. the US dollar and traded at $1.5023. The pound fell 0.9% against the euro trading at 90.04 pence. According to Bloomberg the pound is the worst performer of the most traded currencies and has lost 7.1% so far this year.
UK Recovery Lags Behind Euro Zone
The UK economy expanded by 0.3% during the last three months of 2009 and in the UK recovery from the global recession has lagged behind the Euro Zone and the US. Last week’s data points to a stalled recovery in the UK. Mortgages approved by the nation’s largest banks fell to a nine month low in February. Other stat showed that the number of workers receiving unemployment benefits fell in February. Many investors remain wary of the pound due to the UK’s large trade deficit. Jim Rogers, chairman Rogers Holdings and co founder of the Quantum Fund stated, “Things are pretty bad for sterling for the long, long, long term. I cannot imagine buying sterling back unless it gets really cheap.”
India Raises Rates
The US dollar and the yen gained Friday after India raised interest rates and the Dow Jones Industrial Average fell dimming demand for riskier assets and currencies. The troubled euro posted its largest weekly decline against the dollar as the euro zone remains without any agreement on how to aid Greece. Greek Prime Minister George Papandreou indicated his government may turn to the International Monetary Fund for help if the EU does not establish a lending mechanism at the upcoming EU summit on March 25th and 26th. Many believe that if Greece turns to the IMF the credibility of the euro will be threatened.
Posted on 19 March 2010
Persistent Greek Concerns Pressure Euro
The euro fell for the second straight day vs. the US dollar and the yen on concerns that a political rift in the EU will hamper the multi nation group from offering financial assistance to debt ridden Greece. Greek Prime Minister George Papandreou has set a one week deadline for the EU to devise a financial aid package at the upcoming EU summit next week. Papandreou also said he will turn to the International Monetary Fund unless EU nations devise a lending plan at next week’s EU meeting. The IMF option is opposed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy who say it would show the world that the EU is incapable of solving its own problems. Sebastien Galy of BNP Paribas SA stated, “It’s political brinksmanship now. People are expressing their views on Greece and its issues by getting short euro-dollar.” The euro fell 0.8% against the dollar to $1.3625 and against the yen fell 0.8% trading at 123.04 yen.
German Opposition to Greek Aid Widespread
German opposition to an EU loan program has been fierce and has caused a political rift between Greece and Germany. German Chancellor Angela Merkel’s government is attempting to avoid making any commitment to an EU bailout program for Greece. Merkel’s government believes that Greece should turn to the International Monetary Fund for aid. Yesterday Merkel told the German Parliament in Berlin that the IMF id possible the only answer to Greece’s massive debt problems. German lawmaker Michael Meister, a member of Merkel’s Christian Democratic Union said in Berlin, “We have to think about who has the instruments to push for Greece to restore its capital-markets access. Nobody apart from the IMF has these instruments.” Meister also said that trying to bailout Greece without the IMF “would be a very daring experiment.” German opposition may hamper any EU efforts to devise a contingency rescue plan for Greece. Merkel told Parliament yesterday, “The problem has to be solved from the Greek side and everything that is being considered has to be oriented in that direction.”
Many Expect Germany to Soften Opposition
The political differences are weakening investor confidence in the multi nation currency. Simon Derrick of BNY Mellon Corp. in London stated, “The euro is weakening as investors are questioning whether there really is a plan to support Greece. From an investor’s perspective, do you feel comfortable, in these circumstances, being heavily invested in peripheral Europe?” Some experts believe that at some point Germany will stop playing hardball and relent to an EU solution. Paul Hofheinz of the Lisbon Council stated, “The Germans see the same thing that all of us see: that at the end of the day, they’re going to be part of the solution and it’s going to cost them something.”
