So we know all about the debt crisis in the Euro zone and the bailout agreement that was put forth, leaving some in the market to wonder whether or not it was “enough” and to question the structural feasibility of the Euro.
The major question is whether or not the PIIGS countries (particularly Greece) will accept austerity measures to try to get their budget deficits in order. Earlier today, Spain announced new spending cuts designed to show their commitment to austerity. This is a good first step, and Spain will probably have to access the bailout funds. But as I mentioned yesterday, if confidence returns to the EU then borrowing costs will be lower allowing the PIIGS to refinance their debt at lower levels. If they can accept some austerity measures, there is no reason why the Euro can’t survive.
In addition, European GDP figures came in higher than expected showing an expansion of .2%, in a sign that there is still some life in the EU.
Across the channel in the UK, a deal between the Conservatives and Lib Dems has forged a coalition government that has agreed in principle to reduce the UK budget deficit. While this news was deemed positive by the Bank of England, Governor King stressed caution that risks to UK growth have increased.
So there’s some mild risk-taking in the market this morning.
In the forex market:
Aussie (AUD): The Aussie is higher on mild risk taking and gold prices have soared to $1240, which is beneficial to the Australian economy, especially in light of a proposed “windfall profits tax” on mining companies. Employment figures are due out tomorrow.
Loonie (CAD): The Loonie is higher for the fourth straight day as investors are increasing bets that there will be a rate hike in June. The growth story in Canada is still intact and the only thing keeping the Loonie lower is the risk Euro-related risk in the market.
Kiwi (NZD): The Kiwi is slightly higher on risk appetite in the market. Home sales and retail sales figures are due out in the next day or so, which should give a clue on inflation in NZ. This could affect potential rate hikes that the market is expecting mid-year.
Euro (EUR): The Euro has a bid this morning and is higher, as Spain’s spending cuts and EU GDP figures show that there is still life in the region, despite what all of the “doom and gloomers” may have you believe. It’s kind of funny that now that everyone is coming out of the woodwork to talk about the Euro is finished, I’m actually positive on it as a viable currency! Must be my contrarian nature. But that’s not to say I’m positive on its growth prospects (I’m not), but merely that a lower Euro is going to be good in the long run.
Pound (GBP): The Pound is lower this morning as the BOE has jawboned it lower. Governor King came out and said that there are still risks to economic growth, but seemed to be talking out of both sides of his mouth as he also applauded the new government’s plans to reduce the deficit. So while he mentioned that quantitative easing may need to be increased, I don’t think it’s likely. Don’t forget that a lower Pound is better for UK exports, so watch what they do and not what they say.
Dollar (USD): The Dollar is lower as risk appetite is increasing in the market, and though the trade balance numbers came in slightly worse than expected, it is not enough to derail the US economic growth story. Initial jobless claims are due out tomorrow, and Friday we get retail sales figures.
Yen (JPY): The Yen is lower on risk-taking and carry trades. CAD/YEN is the biggest gainer showing signs that market is betting that Canada is the next to raise rates.
As my wife likes to say, “When the party is over, it’s time to go home.” The sooner the Greeks realize this, the better off they will be. Look, everyone in the world would love to retire with full pensions at the age of 52, it just isn’t possible. No one is saying that these guys have to go back to manual labor. Get a fishing boat, take tourists out. With a declining Euro, the PIIGS countries will actually benefit.
Sure there’s going to be anger right now, and we haven’t seen the last of the rioting. But pretty soon the crowd starts to thin out, as the intelligent ones realize they can secure jobs for themselves while the other idiots are out rioting! Before you know it, there’s only 2 guys out there banging the drum, and everyone else has reluctantly gone back to work.
So the punch bowl has been removed. There will be other parties in Greece. The sooner they realize this, the better.
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