It was another night of ‘deal or no deal’ ahead of the ECB and BoE rate announcement this morning. Price action has been choppy, influenced mostly by a higher than expected Chinese CPI inflation print (+4.5%) and the fear that the Greek coalition talks were to end in no agreement being quickly followed by reports of a tentative agreement. None of this did anything to impress, nor promote enthusiastic risk taking. Apparently in Greece, the issues regarding supplementary pensions or [...]
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February 9, 2012
BoE and ECB Showtime
Greece’s “Last Minute” Incomplete Deal
Greek Finance Minister Evangelos Venizelos is in Brussels today. He brings an incomplete deal on austerity measures to Euro zone finance ministers, and they must decide whether Greece has already done enough to receive a bailout package needed to prevent the country default. Venizelos said he hoped they would make a positive decision. “A Greek default will not be on the agenda of today’s emergency finance ministers’ meeting, which starts at 6 p.m. in Brussels”, said a euro zone official.
A [...]
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February 8, 2012
No EURO Freeze just Squeeze
A Greek deal is almost here again, maybe tomorrow or Friday or next week! It’s like dealing with an adolescent teen and their irreverent actions. Accountability and big picture politics do not seem to be included in the Greek decision process, otherwise there would be a greater sense of urgency and unity rather than domestic discord and non decisions. Despite all this, the hint, the potential, the wanting has the EUR bid over the past two sessions, allowing it to print a two-month high. The market reaction is letting the SNB and BoJ to breath, not any easier, but breath.
Greece’s principal political parties are supposedly meeting with Prime Minister Papademos this morning to discuss austerity measures negotiated with the EU/IMF Troika. In political reality they are expected to be endorsed, if not, the EUR has a long way to fall. PSI discussions continue in tandem and are the other element necessary before the next installment of bailout funds can be advanced. Everyday the Greek default date next month gets closer and it will not be come down to who ‘flinches’ first. A section of the market already believes a PSI deal has been agreed, uncertainties will remain over the actual level of bondholder participation and it will be this that will create further market stress over the coming weeks.
It’s probably not a stretch to believe that the EUR will consolidate in this range 1.3230-1.3320 ahead of the ECB meeting tomorrow. It seems that the market believes that dips provide a good buying opportunity. All week, the hopes for Greek closure, not foreclosure, has had leveraged players, speculative bids and reserve managers jump on the EUR happy train. It is this that has helped the currency pair to run stops above some significant resistance levels. Now, its wait and see time again. What will Draghi say?
As for the BoE, sterling is naturally expected to underperform or lag its Commonwealth currencies (AUD, CAD, NZD etc) despite printing a three-month high, as investors position themselves ahead of tomorrows BoE meeting. Concerns about the possibility of extending the central banks asset-purchase program is likely to mute some of Cables gains in this ‘risk-on’ environment. Be careful, the possibility of more aggressive easing by King and company could add to the upside risk of the EUR on the cross.
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EZ debt crisis infographic
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Greeks Trying Again to Seal an Austerity Deal
One deadline after another has come and gone. A meeting that had already been delayed on Monday night was postponed again on Tuesday evening as the leaders of the Greek coalition parties said they had not seen the document outlining the austerity deal.
Meanwhile, a general strike by public- and private-sector unions shut banks, slowed public transport, closed schools and forced hospitals to operate with skeleton staff on Tuesday.
During yesterday’s late night talks involving EU, ECB and IMF officials, the final touches to the 50-page draft text of the agreement has finally been made. The text was eventually given to officials from Pasok, New Democracy and the far-right Laos party today in the morning.
Later today, Greek Prime Minister Lucas Papademos is due to meet coalition parties in an attempt to seal an austerity agreement to secure a new EU/IMF bailout. The accord is likely to include a 20% minimum wage reduction, pension cuts and 15,000 civil service lay-offs.
Source: BBC
February 7, 2012
SNB to Intervene in the Currency Market
The Swiss National Bank (SNB) will enforce its minimum rate of 1.2 Swiss francs per euro and is ready to buy unlimited amounts of foreign currency in any global interbank market, said interim president Thomas Jordan on Tuesday.
The SNB introduced the 1.2 francs-per-euro cap in September to stem the Swiss currency appreciation in an effort to relieve the pressure on the country’s exporters and prevent the risk of deflation.
However, even at the current rate the franc is still very strong, which is harming export profitability, and firms are suffering from compressed margins. This may force some companies to move production abroad, Mr. Jordan said.
According to Mr. Jordan, this move has helped to some extent to facilitate planning for export-oriented companies, and to reduce the risk of both deflation and severe structural damage to the Swiss economy.
When commenting on the growth outlook, Mr. Jordan said that gross domestic product will slow “considerably” this year and there is “absolutely no risk of inflation in Switzerland” even after the SNB cut its key interest rate to near zero and improved market liquidity.
Source: Wall Street Journal
Indian Growths Slows Down
India’s economy will grow at its slowest rate in three years in the fiscal year ending in March, according to an outlook released on Tuesday by the government’s central statistics office.
The office revised its estimate for GDP growth for the year to 6.9 per cent. If the number is confirmed, it will mark a strong decline from last year’s 8.4 per cent.
Industrial production and foreign investments contracted, the rupee was Asia’s worst-performing currency, and the country’s current account and fiscal deficits increased.
Manufacturing is expected to grow by just 3.9 per cent in the year to March compared with 7.6 per cent in the previous year. Agriculture is set to grow by 2.5 per cent, compared to 7 per cent in the previous year. Mining is set to contract by 2.2 per cent, compared to 5 per cent growth a year earlier.
Some economists say that next year’s growth is expected to remain in line with this year, since they are not expecting significant uplift in consumption or investment demand – the core trends that are needed for growth.
Source: FT
EUR Pegged to be Lower?
Market surprises seem to be coming in three’s this morning. EUR is still in demand and is beginning to encroach on price tipping points that has more than a few weaker shorts worried. Last night, the RBA stuck to its guns and kept rates unchanged at +4.25%, resulting in the market being flat footed and the currency spiking to print 1.0815. Despite being close to even odds of nothing doing down under, market reaction indicates the breath of Governor Stevens surprise. Finally Yen, it has weakened for the third time in four-days outright and against the EUR after government data showed Japan carried out so-called “stealth intervention” to weaken the currency in November. More rhetoric from Japans Finance Minister Azumi stating that he will not rule out any options to curb the currency’s appreciation certainly has the bears on the back foot this morning. With macro dollar bids below and a decent amount of offers near yesterdays peaks could have the ‘newer’ JPY range again lacking impetus and inspiration.
Merkel indicating that the EU would not allow a ‘destabilizing Greek bankruptcy to occur’ is providing tepid support for the single currency. Sovereign and real money offers into the upper 1.31’s are again being tested. Larger stops are placed above the figure and barriers into 1.3250. Greek headlines will again dominate intraday activity, whilst fresh failures at this upper tier will generate short term-fast money exchanges, last seen after last Friday’s stellar NFP report.
Fitch ratings has reiterated its Greek concerns this morning, believing that the Euro-zone sovereign debt crisis is likely to be “prolonged,” and that severe “contagion” is likely across Europe if bailout negotiations in Greece fail. Officials continue to struggle to make headway on austerity measures, which are detrimental in obtaining the next installment of the bailout package before next months bond maturities. Prime Minister Papademos and opposition leaders are back at the table while the country goes on general strike today. The divergence within the political arena has many observers increasing their estimates of the likelihood that Greece will eventually exit from the EUR. Creditors cannot be allowed to continue to provide further support if Greece remains non compliant to its debt program.
A disappointing headline print for German Industrial Production is bearing pressure down on the single currency. IP in Europe’s largest economy fell sharply in December (-2.9%) with all categories recording a fall. In quarterly adjusted terms IP fell by -1.9% in Q4. However, other survey indicators point to the pace of output picking up this year. For now, it’s just another excuse to sell!
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US Curve flatter despite a bid EUR
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Euro Could Survive Greece Exit
Yesterday, Greek Finance Minister Evangelos Venizelos said the negotiations in Athens were “so tough that as soon as one chapter closes another opens”. The negotiations will continue today, as Greek party leaders meet in the afternoon. Meanwhile, two of the largest Greek public-sector unions today began a strike in protest of the coming austerity program.
The EU, IMF and European Central Bank have made further spending cuts, labor market reforms and bank rescues a condition of extending a new bailout. Deadlines have come and gone during the negotiations, but Greece faces one unavoidable deadline on 20 March – a 14.4bn euros debt repayment that it cannot currently afford to pay. If these conditions are not met, Greece faces inevitable default.
There has been growing speculation that Eurozone leaders are preparing the way for a Greek exit from the single currency. Greece exit would not end euro, says, European Commission Vice President Neelie Kroes. “It’s always said that if you let one country get out, if it asks to get out, then the whole structure collapses. But that’s simply not true”, Ms Kroes told to the Dutch newspaper Volkskrant.
A similar optimistic message was delivered by Jean-Claude Juncker, chairman of the “Eurogroup” of Eurozone finance ministers – “The euro will outlive us all”, he said.
Source: BBC
February 6, 2012
Brazil Central Bank Intervenes to Ease Rally
The central bank of Brazil bought dollars in the forex spot market today in order to hold down the soaring value of the real, the Brazilian currency. So far this year, the real has appreciated by 8.5 percent, placing pressure on exporters.
Economists attribute the rise of the Brazilian real to the inflow of capital. Oversees debt markets were tapped by Brazilian companies to the tune of 14 Billion USD this year. Other thriving South American economies, such as Colombia, have similarly appreciating currencies and face the same choices as Brazil regarding intervening in the currency markets.
Source: Bloomberg
Eurozone Recession Could Cut China’s Growth by 50%
The International Monetary Fund (IMF) said today that a recession in the Eurozone would likely reduce China’s actual growth by about 50 percent of the current projection. That would place China’s growth for 2012 at roughly 4 percent should the Eurozone crisis devolve into a recession.
It is estimated that China needs to maintain yearly expansion in the range of 8 to 10 percent to meet the needs of its emerging workforce. While growth of this magnitude would result in crushing inflation in most economies, China has sufficient capacity to absorb this rate of growth.
This is due to the migration of China’s rural population to the fast-expanding rural centers in search of work. In fact, it was only in this past year that, for the first time in the nation’s long history, China’s urban residents finally outnumbered the rural population.
Still, this is not to say that inflation has not been a concern. In 2011, China’s economy grew by 9.2 percent even after the government acted to ease price inflation. Food staples in particular rose sharply in the past year far outpacing the rate of wage increases. Property values have also climbed forcing the government to implement a series of measures to curb speculation.
Greece Moves Closer to Default
Underscoring today’s IMF’s warning is the latest news indicating that Greece has failed to come to terms with European officials on the implementation of a second emergency funding package. Several deadlines have been missed to reach an agreement but time is becoming an ever-greater concern. Greece has a 14.4 billion euro ($10.9 billion) bond due on March 20th and time is running out to get the funding in place and prevent a default.
The failure to agree on a new debt deal is being blamed on Greece’s inability to get the leaders of the three main political parties to consent to acceptable terms. Still, progress has been made in some areas; the Greek leaders have tentatively agreed to spending cuts equal to 1.5 percent of the countries Gross Domestic Product.
Greece’s hesitance is understandable given the degree of public opposition the proposed spending cuts. The country’s largest public sector unions have already threatened to impose a nation-wide strike expected to bring the country to a virtual stand-still later this week.
Regardless of the public hostility, European leaders are clearly losing patience with the Greek government’s continued foot-dragging. French President Nicolas Sarkozy was quoted as saying that European governments “want this accord” at a press conference in Paris earlier today.
“Greece’s leader have made commitments and they must respect them scrupulously,” warned Sarkozy. “Europe is a place where everyone has their rights and duties. Time is running out, it needs to be concluded, it needs to be signed.”
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