Bet you never thought you’d hear that unless it was the punch-line to some joke. All kidding aside, this past weekend French President Sarkozy gave Greece his support and claimed that if Greece was allowed to fail, then the Euro would be “pointless”.
I’m not sure how this is going to sit with Germany, who I’m sure don’t appreciate France undermining its stance. For all the talk of Greece leaving the Euro zone, what if Germany was the one to up and go? I don’t see this as a likely scenario and see this as more of “good cop, bad cop” tag-team effort to keep the Euro from losing further value. At the end of the day, German banks have huge exposure to Greece so it is definitely not in their interests to see Greece fail. As of right now, for all the fear of monetary bailouts, the only thing on the table right now is allowing Greece to piggy-back on the good credit of Germany. Meanwhile the EU is working to create a lender of last resort and limit credit default swaps to help prevent another potential catastrophe.
This is a pretty light week for news, which usually puts me on edge to “expect the unexpected”. Barring any unexpected negative news, I expect to see a continuation of last Friday’s market action as moderate risk-taking should have the upper hand.
In the currencies:
Aussie (AUD): There is no real news for the Aussie this week until Thursday, when they report their unemployment figures. Right now the Aussie is still the dominant currency and destination for carry trades. We’ll get a better idea of how the Aussie is going to fare going into Thursday but for now I expect the Aussie to move higher on risk-taking themes and commodity prices. The Aussie should hold short-term support at .91 vs. USD.
Kiwi (NZD): The big news of the week for New Zealand is the interest rate decision due out on Wednesday. The Kiwi is higher this morning as home prices have advanced for the fifth straight month in what some traders may feel is the onset of inflation. Personally, I don’t see a rate hike coming at this meeting so we’ll have to see how the market reacts but for now I expect the Kiwi to trade higher into the meeting on expectations of a rate hike and moderate risk-taking with the potential for those gains to be erased if the hike doesn’t happen. Stay tuned.
Loonie (CAD): The Loonie continues to “receive love” from the market as more and more people are starting to catch on to the economic story in Canada. A report out this weekend claimed that the Loonie to could surpass the Aussie as the majority of options bets placed on the Aussie/Loonie pair are for the Loonie to strengthen. While the Loonie may do better in the short-run as traders begin to expect a series of rate hikes, don’t lose sight of the impact of the interest rate differentials, as the Aussie is currently yielding 4% and the Loonie is yielding .25%.
Euro (EUR): As mentioned the Euro got a boost from Sarkozy’s comments this weekend, but is trading marginally lower than the commodity currencies. Financial stability is the name of the game for the Euro and I expect it to trade sideways for a while as the drama unfolds. This is not the final word on Greece so I expect we’ll see it trade range-bound between 1.345 and 1.38 vs. USD depending on the “he said, she said” between Merkel and Sarkozy. Not to mention German CPI, which is due out on Wednesday.
Pound (GBP): The Pound is down against all but the Dollar and Yen, as mild-risk taking is the flavor of the morning. On Wednesday we’re going to get the estimate of Feb. GDP and the Industrial production and manufacturing figures. Should those numbers come in weaker than expected than we could see the Pound re-test last week’s lows.
Dollar (USD): The major thing to look at this week is going to be Friday’s retail sales figures. This is going to give a clue as to the behavior of the US Consumer, and well as the confidence figure due out the same day. The US consumer represents some 70% of GDP so if these numbers are better than expected than it could compel further risk-taking and dollar weakness. Leading up to those numbers, we have a couple of Fed speakers out to entertain us with their jaw-boning of the dollar. Remember, forget what they say, and watch what they do!
Yen (JPY): Japanese GDP is due out on Wednesday but frankly, the Yen is going to trade on risk themes this week. Still considered the top funding currency for carry trades, I can’t foresee a situation that would cause this to change barring an interest rate hike which is an uncertainty.
So, for a week with surprisingly little news, it seems kind of busy. Watch out for the British GDP figures on Wednesday to be a key point, and this could be the week when the Loonie jumps the Kiwi on the risk scale.
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