With the drawn-out drama in Europe over the Greece crisis weighing heavily on the Euro, a temporary respite may be in order as the EU members have finally agreed to a solution. Leaders have agreed to a mix of IMF and other loans which all but guarantee the debt. This will help Greece find more attractive re-financing rates, but by no means solves the problem.
But with regard to the Euro, one has to wonder who is next. Portugal recently had its debt downgraded, and Ireland and Spain are also not in good shape. Does this agreement create a moral hazard and send the other PIIGS countries looking for guarantees as well? Time will tell.
Additionally, US GDP figures came in at 5.6% annualized, less than the expectation of 5.9%, but the highest reading in over 6 years. Corporate profits are up, but so far this has not translated over to higher employment. The market is concerned that the majority of this “growth” has come from government spending by way of the stimulus programs.
In the forex market:
Aussie (AUD): The Aussie is lower this morning after being higher earlier this morning on news that China may allow its currency to appreciate. While initially the news was deemed as positive for the Aussie as this shows that China may be concerned about inflation; the market may have changed its tune as this could mean less demand for Aussie exports. Also, the Australian Conference Board Leading Index came in negative at -.2%, which could mean slowing growth.
Kiwi (NZD): The Kiwi is higher this morning as gains in exports helped the trade surplus widen. Higher commodity prices and news that China surpassed the US as New Zealand’s second largest export market. We could see a reversal today in the Kiwi if the market follows the same logic as the Aussie.
Loonie (CAD): The Loonie is lower this morning, giving back some recent gains, particularly vs. the Euro and Pound which have been beaten up as of late. The economic picture in Canada still looks good, so today the Lonnie is “less pretty” than other days.
Euro (EUR): I mentioned the Euro above which is higher across the board after the uncertainty surrounding the Greek bailout has been lifted. The Euro reached 1.34 earlier this morning vs. the Dollar, but is now trading lower to 1.335.
Pound (GBP): The Pound is also higher this morning, as total business investment fell less than expected. The Pound is also benefiting from the Euro news.
Dollar (USD): The Dollar is beginning to strengthen this morning, taking back some earlier gains from the Pound and the Euro. US GDP figures came in at the highest level in over 6 years, which on the surface appear that the economy is heating up. However, I think there is some inherent risk in the market over the possibility of China allowing its currency to fluctuate; as China right now is one of the biggest drivers of world demand.
Yen (JPY): The Yen is mixed this morning as CPI figures came in as expected, showing deflation. Expect the Yen to continue to weaken unless major risk-aversion causes carry trades to be unwound.
So as one problem appears to be solved, another may be emerging. While it is could that the EU stepped up to handle their business (well sort of), the risk of moral hazard in the Euro zone does not go without notice. Should another of the PIIGS countries decide to test the resolve of the EU with a similar situation, then there could be REAL problems.
In addition, now that the healthcare debate is over in the US, the government has time on its hands to look at other problems. We started hearing recently that Washington DC may put additional pressure on China regarding its currency valuation, but that is a conversation for another day.
All I can say is that with much of what Washington DC tends to do—be careful what you wish for!
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