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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Positive Asian Data Lifts Euro

The US dollar fell against the euro and other major currencies as risk sentiment improves among traders and investors. Positive economic data from Japan and Australia and rising Asian stocks lifted risk appetite prompting slight euro gains. Many expect the Euro’s gains to be short lived unless Greece provides more details on proposed austerity measures before the nation’s bond issue next week. Risk sentiment was lifted by an increase in Japanese industrial production and strong gains in Australian private sector credit. Markets are waiting for the results of a meeting of the G 20 nations to take place in South Korea this weekend.

Germany May Purchase Greek Bonds

The euro posted slight gains on the US dollar after German officials said that Germany may purchase Greek bonds through the government owned KFW group. Fabian Eliasson of Mizuho Corporate Bank Ltd stated, “This was the first specific bit of news that Europe will give some support financially to Greece. There have been talks but no promises. The market was oversold in euros. Something like this comes out and people are reacting to the news.” The euro gained 0.5% trading at $1.3617 up from $1.3548 Thursday. The euro gained 0.3% vs. the yen trading at 121.01 yen. This month the euro has lost 1.8% vs. the dollar and 3.4% against the yen. German owned KFW group is preparing a plan to grant Greece 25 billion euros ($34 billion USD) if needed. Robert Lynch of HSBC Holdings Plc in New York stated, “If Germany is leading this effort that’s a more credible process from a markets perspective than if other smaller powers were leading it. There is a perception that if there is an EU effort to support Greece, Germany needs to lead that effort or it won’t take place.” Germany is the euro zone’s largest and strongest economy.

BOE Says Further Emergency Measures May be Needed

Greek Prime Minister George Papandreou told the BBC that Greece needs 53 billion euros this year and by May faces bond redemptions of 20 billion euros. He also said that Greece has enough cash to last until the middle of March. Currency experts say that the euro is vulnerable due to concerns about the fiscal health of several EU nations. The pound fell 1.7% against the euro trading at 89.42 pence the largest decline since September 15th 2009. Bank of England policymakers said that further emergency measures may be required to bolster the nation’s declining economy. Lane Newman of ING Groep NV stated, “Right now sterling is weakest out of the G10. Regardless of what the market thinks, reserve managers would rather hold euro over sterling. The U.K. arguably has bigger problems than the euro zone.”

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Dollar Posts Losses vs. Yen and Euro

The Greenback fell against the yen and the euro after Fed Chairman Ben Bernanke told congress that rates will remain low for and extended period. An unexpected decline in US home sales bolstered investor outlook for low Fed rates and reinforced the perception that US recovery will be a long and turbulent process. The troubled euro went as high as $1.3626 in currency markets and last traded at $1.3600, a gain of 0.7%. Bernanke’s testimony dampened speculation that rates would rise soon, a policy that would bolster the value of dollar denominated assets. In prepared testimony in front of the House Financial Services Committee Bernanke said that , “The (Federal Open Market Committee) continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Weak US Data

The weak US housing data showed that American consumers are still struggling during the ongoing recession. The data showed that sales of new homes declined in January by 11.2% a record low. Vassili Serebriakov, of Wells Fargo said, “All combined, there are not a lot of reasons to buy dollars today,” he said. “The initial reaction has been negative for the dollar but I wouldn’t be surprised if that reverses because there are even fewer reasons to buy currencies such as the he euro and the pound.”

Bernanke Says US Recovery is ‘Nascent’

Bernanke told congress that the US economy is in a “nascent” recovery and still requires low interest rates to encourage spending by consumers and businesses once the stimulus measures expire. Bernanke told the Committee, “A sustained recovery will depend on continued growth in private-sector final demand for goods and services. Private final demand does seem to be growing at a moderate pace.” Bernanke, who began his second term as Fed Chairman said that dismal labor markets and low inflation will allow the Federal Open Market Committee to keep benchmark rates low for an ‘extended period. Bernanke said the Fed will have to start to tighten monetary policy ‘at some point.’ Bernanke further stated, “The FOMC continues to anticipate that economic conditions — including low rates of resource utilization, subdued inflation trends, and stable inflation expectations — are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Bernanke said that “tentative” signs of labor market stabilization such as fewer job losses, a rise in employment in the manufacturing sector pointed to recovery. About the labor market Bernanke said, “Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce,” He pointed out that 40% of the unemployed have been without jobs for six months are a “particular concern” for the Fed.

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Dollar and Yen Post Gains

The Japanese yen and the US dollar rose against most major currencies on Tuesday (Feb. 23rd) after reports that showed a decline in German business and lowered US consumer confidence. The reports couples with the ongoing Greek crisis sent investors in search of safe haven assets. The yen was the big winner gaining on almost all major currencies and the troubles euro fell even further after a report by the Munich-based Ifo institute said that German business confidence fell in February for the first time in eleven months. Brian Dolan of Forex.com stated, “It’s an abysmal consumer confidence number and the risk trade is under pressure as a result. Treasuries are rallying, yields are falling and that pushes the yen higher.” Many investors believe that global recovery has stalled and are putting their money into safe haven assets and currencies. Fabian Eliasson of Mizuho Corporate Bank Ltd. Said, “People are not feeling optimistic on the economic outlook and the yen becomes the safer choice. It could be a one-off low mark but the stock market is suffering from this now.”

All Eyes On Bernanke and Fed

Investors are waiting for Fed Chairman Bernanke’s statements to congress on Wednesday. Many expect Bernanke to tell congress that the Fed will not tighten monetary policy anytime soon. San Francisco Federal Reserve Bank President Janet Yellen said that the US economy still needs extraordinarily low interest rates to address “undesirably low”, inflation. Bernanke will testify to congress on Wednesday and Thursday. Tomohiro Nishida of Chuo Mitsui Trust and Banking stated, “The market will try to determine what the next move by the Fed is likely to be and is waiting to see if Bernanke will say something which was not in his written testimony earlier this month,. Although Fed officials sought to stamp out the idea that the discount rate increase is a tightening of monetary policy, the move did give the impression the Fed had started to exit from loose monetary policy.”

Merkel Attacks Speculators

Euro sentiment remains negative as Greece’s fiscal problems increase. The euro has fallen a full 10% vs. the US dollar since November 2009. German Chancellor Angela Merkel said that resolving the Greek crises is the “core element” in re establishing confidence in the euro. In a speech on Monday Merkel stated, “The debt that had to be accumulated, when it’s going badly, is now becoming the object of speculation by precisely those institutions that we saved a year-and-a-half ago. That’s very difficult to explain to people in a democracy who should trust us.” Clearly the Euro’s troubles are not going away anytime soon.

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Dollar Gains on Fed Rate Hike

The US dollar gained on most major currencies after the Fed announced rate hikes prompting a decline in risk sentiment. Boris Schlossberg of GFT Forex stated, “We had a shock to the system yesterday with the Fed’s discount rate hike. The first reaction was to take risk off the table.” The dollar also posted a six week gain on the troubled euro as investors speculate whether the Federal Reserve will withdraw emergency measures along with the recent rate hike. Earlier the euro hit a nine month low against the dollar after European finance ministers told Greece to implement austerity measures and gave the troubled nation until March 16th to comply. The Fed boosted the rate it charges banks for direct loans from 0.50% to 0.75%. Many experts believe the move indicates that the Fed is ready to start withdrawing stimulus measures taken at the beginning of the global recession. Vassili Serebriakov of Wells Fargo stated, “The dollar should continue to do well against weaker G10 currencies like the euro, the yen and the pound” and also said that the rate hike “was an important first step on the way to policy normalization.”

Fed Statements

In a statement the Fed said that “the typical maximum maturity for primary credit loans will be shortened to overnight” on March 18th and that “These changes are intended as a further normalization of the Federal Reserve’s lending facilities.” The Fed also said that the recent moves “do not signal any change in the outlook for the economy or for monetary policy.” In January the US cost of living rose less than forecast and a measure of prices excluding food and energy declined for the first time since 1982. The combination of the rate hike and the rise in risk aversion benefited the greenback in global currency markets.

Fed Says Hike Does Not Signal Monetary Policy Changes

The greenback’s gains were pared after Fed Bank of St. Louis President James Bullard said that the perception that borrowing costs will increase is “overblown” while Atlanta Fed President Dennis Lockhart stated that the hike does not signal a change in monetary policy. Andrew Busch, of Bank of Montreal said, “The CPI report adds some credence to the commentary from Bullard and Lockhart. But when the Fed raises an interest rate, even the discount rate, its tightening policy The U.S. is attempting to exit extreme monetary policy looseness. That should boost the dollar versus the euro.” Most traders believe the euro will remain under pressure until the Greek crisis is resolved.

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Fed Policymakers Discuss Exit Strategies

The US dollar came close to a seven month high against a basket of major currencies on Thursday after the minutes of the FOMC meeting showed that Federal Reserve policymakers had discussed exit strategies for stimulus programs. The troubled euro fell vs. the dollar and the pound was pressured by economic data that showed a sharp decline in UK public finances. Experts are concerned that the harsh measures Greece needs to take to address massive deficits could slow euro zone growth and recovery and force the European Central Bank to postpone tightening monetary policy. Tom Levinson of ING stated, “ECB tightening risks being delayed, and yield differentials are playing in favour of a lower euro/dollar.”

Fierce Opposition to Aid For Greece

Fiscal problems in Greece continue to weigh on the already troubled euro. On Wednesday Greek Prime Minister George Papandreou said that Greece is not seeking a bailout but needed ‘breathing space’ to cut deficits and borrow “on normal conditions”. On Tuesday European finance ministers gave Greece until March 16th to show that budget cutting measures are being implemented. Greece’s problems have caused sharp divisions in the Euro Zone. A recent German poll showed a sizeable majority of Germans oppose any aid to Greece and a Dutch poll showed similar results. German Chancellor Angela Merkel’s government remains opposed to Greek aid despite fears that failure to aid Greece could damage the euro. Reaction to the German stance has been bitter in Greece. One leading German newspaper has described Greece as a nation of lazy cheats and said that Greece should be “thrown out of the euro on their ear.”

IMF to Sell Tons of Gold

A plan by the International Monetary Fund to sell gold on the open market has put downward pressure on the Aussie dollar and other commodity based currencies. The IMF said it would sell 191.3 tons of gold on the open market pushing down bullion prices. Jonathan Cavenagh of Westpac stated, “The gold sale news is weighing on the Aussie especially against the U.S. dollar which is seeing a biddish tone. We have a month-end target for 82 for the dollar index and given the sovereign risks surrounding the euro and the macro economic pulse getting better for the U.S., we would see every dip in the dollar as a buying opportunity.”  After the IMF announcement spot gold dropped and dragged both the Aussie and Kiwi dollars down. The Kiwi dollar fell 0.2% to $0.7006 and the Aussie fell 0.2% to $0.8960 .

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Euro Gains Limited

The euro gained slightly as Greek fiscal worries persist. During the last few weeks the euro has been undermined by persistent worries over the health of some EU member nations. Euro gains were limited as investors await the results of a meeting of European Union finance ministers. Nick Bennenbroek of Wells Fargo stated, “A brief pause in European related headlines perhaps offers hope for a corrective bounce (in the euro) in the coming days.” EU nations told Greece on Monday to implement measures to reduce its deficit by mid March. The euro has fallen 5% against the US dollar since the beginning of the year on concerns about the fiscal health of Greece, Portugal and Spain. Fears of a European debt crisis have pushed the dollar to its highest in nine months vs. the euro.

ECB May Delay Rate Raise

Many traders and investors believe that The European Central Bank may have to delay raising rates to address the budget crisis in several EU member states. The US Federal Reserve is on track to raise rates soon which has pushed the dollar higher in currency markets. Prime Minister George Papandreou said his country is ready to implement necessary measures to reduce the nation’s deficit. Omer Esiner of Travelex Global Business Payments said, “There’s been a little moderation of concern about the debt crisis. Investors are still wary about the situation, but most of the bad news is reflected in the value of the euro. It’s come a long way down in a short period of time.” Greek government workers have threatened a 24 hour strike to take place on Wednesday to protest the budget cuts.

Aussie Gains on Japanese GDP Data

The Aussie dollar gained after the Australian central bank said further rate increases are likely if the nation’s economy continues to improve. According to Bloomberg there is a 25% chance that the Reserve Bank of Australia will raise rates by 25 basis points at it’s March 2nd meeting. The Aussie also gained after a report showed that business confidence rose after the Reserve Banks decision to keep rates the same temporarily. The Aussie gained for the second straight day after Australian policy makers released the minutes of their Feb. 2nd meeting which said that their decision to keep rates the same was “finely balanced” and also said policy makers needed time to monitor overseas events. Greg Gibbs of the Royal Bank of Scotland Group Plc in Sydney said the minutes have “a fairly strong indication that they’ve got further hikes to do, which should be somewhat positive for the Aussie. There’s probably not enough risk of a tightening in March priced into the market.”

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Euro at Multi Month Low

The euro fell against the US dollar on Monday (Feb. 8th) and remained at multi month lows due to concerns about the financial health of several EU nations. Euro sentiment remains negative among traders and investors and the euro came under even more pressure after Greek unions said they would fight government austerity measures and threatened to strike. Investors and traders were concerned that the G 7 nations issued no statement regarding currencies and did not address the fiscal problems of Greece, Portugal and Spain. European finance ministers said they would make sure Greece adheres to its budget cutting plans but many analysts say that more is needed to reassure investors. Roberto Mialich of Unicredit in Milan stated, “As long as EMU fears still loom and there is no strong signal from EU authorities that they will do something to tackle the situation in Greece, Spain and Portugal then euro downside potential will remain.”

EU Debt Concerns

The troubled euro has declined almost 10% from a 15-month high of $1.5145 achieved last November. Investors remain nervous that Greece’s fiscal troubles will spread to other EU nations such as Portugal and Spain. On Monday the euro fell 0.1% on the day trading at$1.3645. Risk appetite remains low despite last Friday’s US jobs data which showed continuing improvement in the US labor market. As usual low risk sentiment favored the Japanese yen as investors bought the yen as a safe haven. Akira Hoshino, of Bank of Tokyo-Mitsubishi said, “Market players think the yen might weaken in the longer term, but that trend has not taken hold yet. We will not see that kind of market unless market players start taking on risk and building up their positions.”

Yen Gains on Risk Aversion

The yen is near a ten month high vs. the pound and is at a seven month high against the Aussie dollar. Analysts say the Yen’s rise is due to ongoing investor concern about Greece, fears that China will tighten monetary policies and stock market declines. David Watt of RBC Capital stated, “The risk aversion emanating from Greece, China tightening fears, renewed concerns about the performance of financial stocks, and Obama’s banking plan is taking a life of its own, and the fragility of the recovery is now a market millstone.” Many traders say the yen could weaken later in the year especially if the Bank of Japan takes more steps to loosen monetary policies. Low yen rates make the yen the currency of choice for carry trades.

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