The Greek political leaders are under significant pressure to reach an agreement on needed cutbacks on Monday to comply with demands from the European Union and International Monetary Fund to secure a second bailout worth €130 billion ($171 billion).
After a meeting on Sunday, Mr. Papademos said that the political leaders agreed on some of the basic points of the international lenders’ demands, including spending cuts equal to 1.5% of gross domestic product in 2012 and reduction of supplemental pension benefits to Greek workers. The most difficult terms, where the government hasn’t yet reached agreement, are wage cuts, labour reforms and a plan to recapitalize Greece’s banks.
Prime Minister Lucas Papademos faces a strong internal opposition to the terms requested by the European Commission, IMF and European Central Bank—also known as the troika. Greek government officials say the reduction in wages being sought by the troika will only deepen the country’s recession and widen its budget deficit, because it will reduce both tax revenues and contributions to its teetering pension funds.
Unions representing both Greece’s public sector and private industry have scheduled a nationwide strike for Tuesday in protest against painful reforms.
Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.
The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!
Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.
Depending on what Greek rumor dominates the hour, soft Canadian PMI data this morning could have the currency Bulls scatter a period. Its anticipated that the Ivey PMI could come in a tad softer, maybe decline from 63.5 to even below expectations of 58 in January. A softer reading should be able to kick some of this enthusiastic stuffing out of the energetic Bulls on expectations of a dovish turn from the BoC. This will temporarily lead the CAD to under perform the rest of the risk complex.
CHF continues to rise despite the EUR’s resilience. The SNB’s pledge to hold the CHF 1.20 cap will soon be tested. Since its inception last September it has worked, however, in the past few weeks’ market sentiment has changed dramatically. China considering greater involvement in EFSF and ESM program has done little to support currency so far.
The market has aggressively been playing the risk reward trade at these levels by selling CHF aggressively and waiting for the imminent announcement. The threat of a deep recession in the problem Euro-zone is only making this trade more difficult to stomach. The region has yet to feel the true impact of the implemented austerity measures to reduce their budget deficits. Euro banks tightening their lending policies to both corporate and private interest over the last three months is putting a tighter noose around mainland Europe. The ECB’s increased liquidity policy is not working.
All of this is pointing towards the Euro sentiment plummeting again-CHF and JPY positive. The Franc’s outright performance against the dollar is not exactly helping the SNB. Bernanke’s dovish tone has driven the yield spreads between the US and Swiss even lower and made the CHF more attractive. It seems that all the cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk, however, the rumored $20+ “yards” of stop-loss orders below the cap figure should be cleaned out if the SNB wants to teach the market an expensive lesson.
Below are some other highlights of the week:
EUROPE
EU: The dollar opened the week much stronger against EM and G10 currencies. The risk selloff started during the Asia session, as markets re-opened after the Lunar New Year holiday.
EU: Italy issues +€7.5b in 2016-2022 bonds ahead of their largest redemption for 2012 (February 1st +EUR25b). The auctions were well received, however, post interest saw the ECB buying product.
EU: Portugeuse 5-year product manages to record the highest yields for the post-Euro era of +22.69%, fueled by the turn of events in Greece. The market perception seems to accept a Greek default as a given.
EU Summit: A leaked German proposal for Greece to cede control over its budget in return for financial aid “casted an uncertain outlook on PSI negotiations.” Market continue to question “the soundness of the recent risk rally.”
WSJ reported that a Greek PSI deal ‘may’ be concluded this week. This of course is subject to Greece securing a new financing program from the IMF and EU.
EU: Mixed European confidence surveys contributed to softening risk appetite at the beginning of the week. Services confidence improved while industrial confidence failed to pick up from the recent lows.
EU: Unemployment in the Euro-zone hits a record high +10.4%.
EU Leaders: They have agreed to accelerate the set up of a full time +Eur500b rescue fund (EMS and EFSF) and backed a deficit control treaty. Initially response saw European sovereign markets responding well to the summit outcome, with Italian 10-year yields reversing about half of the previous sessions rise.
EU: The brief Euro-summit has been viewed as a success relative to modest expectations, allowing the market to eliminate some event risk for the euro system.
GRE: Greece PSI remains elusive and is continuing to generate market anxiety.
CHF: The SNB’s December balance sheet report confirms that policy makers used FX swaps to add CHF liquidity during the course of December last year (+CHF 20b).
CHF: The SNB’s balance sheet also revealed small changes to the FX reserve breakdown by currencies (EUR’s share from +54.8% in Q3 to +52.1% in Q4-in favor of dollars and GBP). At current levels, risk reward favors long EUR/CHF.
UK: The market is looking for QE expansion next week in the UK, mostly on the back of money growth remaining very weak. M4 ex-OFC contracted -0.7%, m/m. Net consumer credit declined -£0.4b, while mortgage approvals at 52.9k disappointed vs. the consensus for 54k.
NOK: Norway’s credit rose +6.7%, y/y, above the consensus forecast for +6.5%. Retails sales growth remains solid in annual terms at +2.6%, y/y. The futures market expects the Norges bank to remain resilient as data support call for rates “on hold” at the next meeting.
NOK: The Norges Bank will purchase foreign exchange equivalent to +NOK350m per day for the Government Pension Fund Global in February. This amount is not large compared to the historical average.
EU: Stronger PMI’s in Europe and China allowed risk sensitive deals to pressure the dollar and yen mid-week.
EU: The Euro-zone PMI was revised a tad higher from the initial estimate to 48.8. Digging deeper, the German PMI was also revised higher, while the Italian PMI at 46.8 printed well above the consensus forecast of 45.3. Spain’s was not to be left behind, its PMI rose to 45.1 from 43.7. The data suggests that the business climate is at least stabilizing in the region, including in the systemically critical periphery countries.
Scandinavia, UK and CE3 PMI’s increased strongly. In the UK perhaps further QE becomes questionable? Swedish and Norwegian prints swung back above 50 (expansion).
CHF: In contrast, Swiss PMI decreased sharply to 47.3. They also managed to report a weak retail sale (annual growth rate dropped to +0.6% from +1.8%).
EU: Consistent rumors that a Greek PSI deal has been struck (with a 72% NPV haircut) has pushed investors to strap on more risk. What about the collective action clauses?
EU: There are reports that the PSI deal is being held up by differences between Germany and the IMF. When the “collective actions clauses” are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement.
EU: EU Juncker says that Greek PSI talk are ultra-difficult. The lack of tangible progress in the talks seems to be taking a toll on currencies geared to Europe – CE3, Scandis, ZAR, and TRY.
CNY: Premier Wen has indicated that China is still researching how to participate in the EFSF and ESM program. China supports European effort to stabilize Euro and it may increase their participation via the rescue funds to help resolve the European debt crisis.
CHF: Bernanke’s dovish tone has driven the USD/CHF yield spreads even lower and is making the CHF more attractive. These cross bounces are giving investors better opportunities to own the currency or pare their offside positions outright. Intervention again is the risk.
EU: Spain and France managed to issue bonds, at the front end and in the belly of the curve, to strong investor demand.
GBP: UK construction PMI fell to 51.4 in January from 53.2 (below consensus for 52.5). Manufacturing and services surveys will carry a larger weight for the next BoE meeting (February 9). Analysts are looking for an expansion in the QE program next week based on weak hard data in Q4 and very soft money growth.
EU: The Euro area services PMI was revised fractionally lower from the flash estimate, it now reads 50.4 vs. 50.5.
EU: Greek PSI talks continue, with markets increasingly ignoring statements suggesting progress is being made. Latest reports indicate a deal could be submitted to the EU and IMF over the weekend, and approved at a Eurogroup meeting next Monday.
GBP: The UK Services PMI rose to 56.0 in January from 54.0 in December, the strongest level since March 2011.Next week we get to see if extra QE is to be applied. Unchanged BoE policy or a signal to an end of QE would clearly be positive for GBP as a EUR alternative.
EU: Euro-zone retail sales fell for a second month in December, down -0.4% m/m and -1.6% y/y. Retail sales is again strong proof that the EUR’s 17-nations are threatening to return to recession, if they are not already there. In the 27-member European Union, sales rose +0.3%; largely due to a +0.4% rise in the UK and a +0.7% uptick in Poland.
Japan’s Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing. He and his policy makers can breath a small ‘sigh-of-relief’ after NFP, the market decided to sell the JPY outright! How long is this going to last? These specific market moves are providing better levels to own the currency. Markets have taken the Ministers comments in their stride. Intervention is a rising risk for USD/JPY shorts if the pair falls towards that psychological 75 benchmark. It seems that exporter related sales will continue to cap any upside potential for the dollar. So, fears that the Greek Prime Minister may resign, the uncertainty that the Dutch Government may not want to write down loans to Greece will again make the yen more attractive.
Below are some other highlights of the week:
Asia
CNY: Chinese markets resumed trading following the week-long Lunar New Year holidays. Premier Wen said that the Chinese government will enhance the elasticity of the CNY exchange rate in both directions.
JPY: Japanese Finance Minister Azumi warned against a renewed rise in the yen and vowed to take firm steps against excess volatility and speculative moves in the FX market.
JPY: Japans December IP rebounded +4.0%, m/m, following the -2.7% fall in the previous month (the ‘flood’ knock effect-on from Thailand).
JPY: Yen remains sensitive to G10’s yield compression.
KWN: Korean IP growth fell to +2.8%, y/y in December from +5.8% in November. This is very much inline with soft export growth in December.
SGD: Singapore’s unemployment rate remained at +2% in Q4, despite weakness in IP and GDP growth for the same period. This suggests that the tightness in the labor market is partly structural.
CNY: China’s manufacturing PMI rose +0.2pt to 50.5 (higher than the consensus forecast of 49.6). Importantly, the PMI was much stronger than the seasonal pattern for a -0.7pt fall. New orders up +0.6pt to 50.4 while inventory fell -2.6pt to 48.0. Export orders fell -1.7pt to 46.9 while input prices rallied +2.9pt to 50.0. The data reduces the scope for monetary easing.
KWN: Korea’s CPI inflation fell to +3.4%, y/y, last month (foretasted for +3.6%). Core-inflation also slowed to +3.2%, y/y, from +3.6% in December. Digging deeper, exports fell -6.6% in January (first negative growth in three-years), providing a – $2.0b trade deficit. Note: Asian data may be distorted by the lunar New-Year celebrations.
IDR: Indonesia CPI inflation eased to +3.7% in January as expected. Core-inflation was broadly unchanged at +4.3%, y/y. The futures market expects their Central bank to ease monetary policy further, cutting rates -25bps to +5.75% next week (February 9). Export growth fell to +2.2% in December while import growth surged to +24.3%. The data has narrowed the trade surplus. Is their economy in the first stages of over heating?
TWD: Thai CPI inflation fell to +3.4%, in January (as expected). Futures market again expects the Bank of Thailand to cut policy rates by another -50bps to +2.5% by the end of Q2.
JPY: Comments from Japanese officials are finding it difficult to halt the yen gains. The perception that JPY is one of the most liquid currencies in the world is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that it’s only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
CNY: China’s non-manufacturing PMI fell -3.1pts to 52.9 in January (less than expected). The HSBC Services PMI was unchanged at 52.5 for a third straight month in January.
JPY: Japan Finance Minister Azumi said that the government will take decisive currency steps if needed and that speculative moves in the currency market are increasing.
INR: RBI’s Deputy Governor Gokarn said that the central bank may buy dollar rupee to inject INR liquidity.
Analysts’ employment expectations were blown out of the water on Friday. NFP produced a stellar report, creating +243k new jobs, pushing the unemployment rate down two ticks to +8.3%. Risk has been quickly applied and added to in the markets. The loonie is a shining example of a growth currency outperforming, especially on the back of its own disappointing employment report. However, beware of the extremely bearish risk factors lurking in the background i.e Euro debt crisis, slowing global growth and Iran nuclear concerns, which remain largely ignored, before wagering it all on risk. It’s a good start to 2012 for the Obama administration, but not a trend just yet. The headline print has managed to produce some blood on the “street”, they had predicted a more bearish print.
Below are some other highlights of the week:
Americas
USD: This week we saw incomes pick up during December, +0.5%, however, individuals chose to increase savings instead of spending, showing a caution that will likely keep the US economy in slow growth mode throughout 2012. November spending was unrevised at +0.1%.
USD: Unexpected poor Case-Schiller Home Prices and an unexpected Chicago PMI managed to trigger some macro-money profit taking on the last day of the month. Case-Schilller November 20-city HPI fell -1.3%, m/m. The housing market remains sluggish despite lower prices and interest rates, an abundance of foreclosures and tighter mortgage requirements.
USD: Chicago PMI was 60.2 compared with a forecast of 62.2. The forward looking component, the new order index, dropped in January to 63.6 from 67.1.
USD: US January consumer confidence retreats to 61.1 from 64.8, giving back some of the huge gains witnessed over the past two-months. The fallback was concentrated in consumers views of the current economy. The present situation index (current economic indicators) dropped to 38.4 from a revised 46.5-“consumers are more upbeat about employment but less optimistic about business conditions and their incomes.”
CAD: The Canadian economy shrank for the first time in six-months, dragged down mostly by a decline in energy output (oil and gas fell -2.5%), down -0.1% to +CAD$1.27t in November. The BoC released forecasts from two-weeks ago was for GDP growth to slow to +2% in October through December from +3.5% in Q3.
USD: ADP reported that Private Sector Jobs with small businesses lead the hiring +95k. However, the December print was revised lower to +292k from +325k. Its a “slow and steady pace” that could bring down the unemployment rate, but not rapid enough to return payrolls to their pre-recession peaks anytime soon.
USD: January ISM rises near to expectations of 54.1, proof that growth picked up last month. Digging deeper, prices gained ground after contracting in December, and hiring grew at a slightly slower pace. Factories continue to be a consistent contributor to overall growth.
USD: The number of US workers filing new claims for unemployment benefits declined last week (-12k to +367k), continuing the mostly improving trend seen in nine-months. The four-week moving average decreased by -2k to +375,750, remaining below that psychological +400k benchmark that’s required to add jobs to the economy.
USD: In his House Budget Committee testimony this week, Bernanke has not changed his tune, again stating that the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term US budget deficit.
USD: Dallas Fed Fisher (nonvoter) reiterated his opposition to further QE. He said that QE3 is not needed and that it would complicate the eventual tightening policies.
CAD: Employers hired far fewer workers than expected in Jan (+2.6k vs. +23k) and the jobless rate rose unexpectedly to +7.6% from +7.5%. The data reflects an economy that’s slowing and is consistent with the BoC keeping rates unchanged. Despite creating +129k jobs last year-growth was in the first six-months. (Full-time jobs declined by -3.6k, part-time rose +5.9k, private and public sector increased by +39k while self-employed fell-37k).
USD:NFP produced a stellar report, sideswiping most analysts expectations. Payrolls increased by +243k, m/m, allowing the unemployment rate to ease two-ticks to +8.3%. The breakdown saw manufacturing gain +50k, services +162k and the Government eliminate-14k positions. The hourly income increased +0.2% while the number of hours worked remained unchanged at +34.5.
The biggest fear this morning was not a rumor that China may ease their RRR or the imminent possibility of Cbank intervention in yen, nope, it was Deutche banks forex outage (it seems to have come with their profit outage)! The worlds largest currency player experienced a brief disconnect on ‘Autobahn’ forcing them to experience the old ways and provide voice broking for a full 10-minutes. This certainly highlight the importance of this institutions presence in the FX game or are investors that bored with the same recycled reasons for market movements this week? The closer we get to NFP market positioning will get more interesting.
There are reports now that the PSI deal is being held up by differences between Germany and the IMF. We can assume when the collective actions clauses are being enforced we will get to hear more from the disgruntled creditors. The various posturing by interested parties is in danger of making this the worlds longest ‘expected’ announcement! For now, little news is keeping trading ranges intact.
The overnight rumor of a RRR cut from the PBoC is nothing new, and its something that the market will have to live with until its done. The prospect of a cut was raised ahead of the Lunar New Year, however, data since supported the prospect of monetary easing. Analysts now feel that a rate cut is unlikely for a few months, but manipulating the reserve ratios is a strong alternative. With global growth under immense pressure, a reserve move gives us a shiny ‘Red Knight.’ Perception is everything. However, in this risk on environment their gesture could becomes diluted.
On the other hand, the BoJ presence is much more pressing. Comments from Japanese officials overnight will unlikely halt the yen gains anytime soon. JPY is one of the most liquid currencies in the world and is been seen as a sound alternative to the two prime reserve currencies, EUR and USD. Their stability and debt-led debasement issues are to blame. This would suggest that its only a matter of time before the BoJ appears in the markets directly. A similar storyline is being played out in Europe with the SNB.
This mornings decline in the Euro-zones December Producer Prices (-0.2%, m/m and up +4.3% on the year) will be welcome news for the ECB. Along with positive market sentiment is helping to push Euro periphery yields much lower and aid them in their refunding requirements. Spain this morning was the latest winning candidate, its yields are being pushed to a new yearly ‘floor.’ With risk, offers in the higher 1.31’s are expected to weigh on the EUR’s rebound and keep the market focused on support ahead of 1.31 directly.
Other Links:
Fed’s Near-Zero Interest Rate Policy a Failure?
As part of the Davos World Economic Forum, UK Prime minister, David Cameron is urging his EU counterparts to follow Britain’s example. In his words: “In Britain we had to be bold”.
In a message to his European counterparts, Mr Cameron argued his government’s efforts to tackle its deficit had “earned credibility and got (the UK) ahead of the markets”, and eurozone leaders should now take similarly decisive action.
The eurozone crisis was “weighing down business confidence and investment” across Europe, he said, and EU leaders had to “to show the leadership our people are demanding”.
“Tinkering here and there and hoping we’ll drift to a solution simply won’t cut it any more,” he said.
Weekend discussions between Greece and its private lenders did not result in agreement as many had anticipated. At the same time, it has not been able to derail global equities entirely. It seems that investors have shunned the safety of US treasuries for a fourth straight session on hopes that a ‘Hail Mary’ deal by the Greek government is imminent.
With the beginning of the Chinese New Year holiday affecting market liquidity, some market moves have been slightly overextended. The US yield curve has steepened +3bps with 2/30’s moving out to +289bps, as longer dated securities lead the fall. Prices have also been pushed lower temporarily by German comments on the possibility of running the ESM and EFSF programs parallel. US 10’s are now trading on top of its first resistance point of +2.06%. The 10/30’s spread traded at +189bps, the widest point in six-weeks.
In this morning’s session, treasuries temporarily found a bid ahead of this week’s FOMC meet starting tomorrow and concluding on Wednesday. Policy makers are to introduce “major transparency” as an innovation process with individual FOMC members providing projections of the Fed Funds rates and each to explain the quantitative factors behind the projections.
Also putting pressure on prices will be the US treasury department coming to market this week to sell a total of +$99b in notes (2’s, 5’s and 7’s). First up will be tomorrows +$35b two-years, another +$35b of five-years are set for Wednesday, and finally, +$29b seven-year notes will take place on Thursday. Dealers expect this weeks issue’s to receive ‘extra’ concession, as China, a non-starter, will be celebrating New Year and providing little support. Now its back to ticker watching ahead of a Euro press conference scheduled for 20:30 GMT.
The Nikkei closed at 8,765 down -1. The DAX index in Europe was at 6,432 up +32; the FTSE (UK) closed at 5,782 up +54. US indices remained in negative territory with the Dow currently trading at 12,686 down -34.
What ever happened to the Greek haircuts? Market perception saw it as a done deal, where further details were supposedly forthcoming over the past weekend. According to the IIF, negotiations are ongoing and elements of an unprecedented voluntary PSI are coming into place. However, reports suggest bondholders have drawn “a line in the sand” regarding their maximum offer. That cannot be a market surprise. It’s now unclear whether an outline deal would be ready for approval by the Euro-zone finance ministers meeting today. It was the original deadline set by the Greek finance minister. Whatever happens, Euro ministers will decide what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package later today.
Confused signals suggest range trading rather than a strong “directional environment” for the markets short term. It’s been a battle for both the techie’s and fundamentalists of late. With the EUR’s one directional play, the single currency has been capable of posting bullish reversal signals outright and against the JPY (two of the most crowded trades). However, declining volumes on rising prices should concern the bulls. It’s usually referred to as a bearish indicator.
For the ‘bigger picture’ individual, the overall EUR risks may not dampen the bullish enthusiasm of late. Even Greece’s failure to agree with the PSI may increase “headwinds” for the currency, wider market sentiment should remain somewhat supported by the possibility of an increased ESM bailout facility and growth signs in the US.
The currency is proving more resilient than many had expected. With the regular stops and offers in place ahead of the psychological and mid-term target of 1.3, the market again will be focusing on the meet in Brussels today. Already this morning, German comments on the possibility of running the ESM and EFSF parallel, is supporting the EUR. The strong German debt auction result is pushing the market to test this option barrier, offer laden 1.3 level.
