Forex Blog

January 27, 2012

Week in FX Europe Jan 22-27

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 11:50 am

Plans for the Greek Private Sector Involvement remain a source of considerable uncertainty for peripheral markets, and the inconclusive result of negotiations over the past few days will leave the EUR and risk complex vulnerable to a large correction. However, the EU economic and monetary commissioner has indicated that authorities are very close to concluding their talks, either later today or over the weekend. Will the market add to the risk trades that have been applied since the Fed, earlier this week, increased its “free money” term length by 18-months? So far it’s been too tempting for the market to refuse and risk is being added accordingly.

The mixed signals from the Euro-zone debt market means investors need to tread with caution. Thus far, ECB liquidity has boosted demand for Spanish and Italian debt. The same cannot be said for Portugal. Peripheral bond yields have resumed their collapse this week, with Italian 10-year yields down -18bp to +5.84%, a long way from that +7% imploding benchmark. Portugal remains the outlier, with yields still under upward pressure. Perhaps if China invested in Europe we would not care so much?

Below are some other highlights of the week:


EUROPE

  • EUR: Greek talks were expected to show something of substance last weekend. Not unexpected, this week began with Greece failing to yield agreement on the public sector involvement. Negotiators have been squabbling over the coupon that restructured bonds will carry.
  • EUR: The single currency opened lower in the Chinese New Year and despite all the negatives, soared through last weeks highs allowing the techies to start talking about outside weekly reversals as the currency remains elevated.
  • EUR: Analysts expect that even a successful conclusion to discussions would still leave the actual degree of private sector uptake unclear. EUR bears are still looking for that top, as default risks will not fully ‘abate’.
  • FRF: French January business confidence surprised weak, falling to 91 from 94. The market had been expecting a small uptick, especially after the German IFO and EU PMI prints.
  • EU: Portuguese debt worries have resurfaced to add to Greek default concerns.
  • EU: Finance Ministers reject Greek debt swap offer, coupon demands too high.
  • S&P’s Chambers: Greece ‘In all likelihood’ is down to a selected default. However, this default is not expected to destroy the credibility of EMU.
  • EU: Euro-zone flash PMI’s came in firmer than expected with the composite back above 50 after four-months in contraction territory. This suggests that the region ‘should avoid a collapse in output’ and another quarter in the GDP ‘red’. Manufacturing PMI rose to 48.7 from 46.9 and services PMI rose to 50.5 from 49.0.
  • GER: Their numbers were strong with manufacturing PMI at 50.9 and services PMI at 54.5. Big picture, data should help the Scandis and CE3 currencies.
  • ESP: Spain saw strong demand at its bill auction. Spanish Treasury sold +EUR2.51b of 3-and 6-month bills. The bid-to-cover was high in both issues.
  • EU: With Greek PSI negotiations inconclusive, the IMF is pushing for the ECB’s to take a haircut along with PSI as a means of distributing losses back to governments. However, the ECB and German coalition remains opposed to taking a loss on ECB holdings. Expect the heavy peripheral issuance schedule to remain a key factor in keeping the bulls on their toes.
  • GER: German ifo surprised higher with the expectations component at 100.9, above the consensus for 99 and up from 98.6 previously (the third consecutive rise) and suggests a GDP growth rate of +0.5% q/q.
  • GBP: UK GDP contracted more than expected in Q4, down -0.2%, q/q, vs. -0.1%. The weakness was driven mainly by soft industrial production in October and November and poor services at the start of the quarter.
  • GBP: BoE minuets deferred the decision on more QE until next month, as expected. The assessment on the economy was somewhat less pessimistic as members judged the most serious downside risks have abated. However, others understood that the “risks of undershooting the target meant an expansion of the QE program is likely to be required”.
  • FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
  • HUF: Hungary sold HUF +48b worth of bonds (+13b more than expected). This would suggest that market perception of HUF risk has improved. PM Orban has softened his stance on recent legislation and indicated that he is willing to adjust their policies in order to win financial backing from the EU and IMF.
  • SEK: Manufacturing confidence surprised soft, falling to -14 vs. -11. Analysts believe that weak growth and the recent sharp moderation in core-inflation allows for a rate cut by the Riksbank at the next meeting.
  • EU: Peripheral bond yields have resumed their collapse, with Italian 10-year yields down -18bp to +5.84% (Friday Morning). However, Portugal remains the outlier with yields still under upward pressure.
  • EU: On Friday, Rehn indicated that PSI talks are very close to conclusion, either today or over the weekend.
  • EU: Euro area M3 growth has slowed significantly to +1.6%, y/y, from +2.0%.
  • CHF: Swiss KoF leading indicator dropped to -0.17 this month from +0.01 in December (ninth consecutive monthly decline and the first negative reading in two years). However, the release is at odds with the recent upward surprise in the PMI back above 50.
  • Fitch: Downgrades Belgium, Italy and Spain.
  • PLN: Poland recorded above consensus 2011 GDP growth of +4.3%, y/y.
    Should continue to attract foreign capital and support the PLN.

January 9, 2012

Forex Market Outlook 1/9/12

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 6:45 am

Well we made it through another weekend after Friday’s sell-off in risk currencies despite the fact that the Non-Farm Payrolls (NFP) came in much better than expected.  In Friday’s discussion, I mentioned that even if the numbers exceed the official estimates there could be disappointment.  To be honest, the number was extraordinary and the market sold off anyway.  This means that it was very unlikely that any number could have satisfied the market and the Euro debt crisis is still the dominant economic story.

For further proof of this, look no further than the fact that another record was set for banks leaving money on deposit with the ECB, which is a sign of fear.  Another measure of this fear is that German short-term debt no has a negative interest rate.  In other words, there is so much demand for German paper that people are willing to pay to lend them money, and not receive interest.  This last happened here in the US back in 2008 during our banking crisis so the similarities are telling.

Enter Merkozy to the rescue!  Today’s meeting between the French and German leaders is intended to hammer out the details of the fiscal rules that they agreed to last month and what further actions need to be taken in order to save the Euro.  Among these topics are the potential to increase the size of the bailout facility and how big of a haircut Greek bondholders may be required to take.  This could exceed the 50% losses that have already been discussed.

Meanwhile, the ECB is going to have their interest rate decision on Thursday and the speculation that Monti may try to emulate Bernanke’s maneuvers is starting to pick up, as there is some thought that further monetary accommodation could be necessary to stave off a liquidity crisis.  This doesn’t seem likely at this point and perhaps they will wait until the news out of the Merkozy meeting which they claim is going well at this point.

There is not a lot of news coming out of the US this week on the data front, but we are going into stock earnings season, which could have an effect on the US dollar if the correlations remain in tact.  But recently, it seems as though the correlations have been breaking down a bit so the impact could be lessened.

The Japanese markets were closed overnight for a holiday, and in the Euro zone German trade balance figures came in much better than expected on stronger exports, though industrial production figures came in worse than expected.  Later this week we will get the German Real GDP growth report on Wednesday, followed by CPI data and the rate policy decision on Thursday.

The Bank of England will also be releasing their rate policy but are not expected to have made a change.  Recall that the ECB decision also comes with an accompanying statement, whereas the BOE decision does not.

In Switzerland, the unemployment rate ticked slightly higher than expected to 3.3% from an expected 3.2% and retail sales figures came in better than expected showing a gain of 1.8% vs. the expectation of a .2% gain.  This comes in the midst of a minor scandal involving the currency trading prowess of the SNB honcho Hildebrand’s wife, which is reminiscent of Hillary Clinton’s commodities trading activity.  While this is likely much ado about nothing, there could be changes coming at the SNB.

Lastly, the Fed has the “dog and pony” show this week with a lot of Fed speak from various officials in different venues essentially trying to allay fears but you never know when one wrong statement can send the markets spinning.

And of course let’s not forget the noise coming out of Iran and the potential oil supply disruptions that they threaten but likely won’t act on.  Should the scene over there escalate then we could see oil spike higher.

So the markets are flat to slightly higher this morning, with US dollar weakness and the Euro bouncing off of lows that saw the Euro trade a 1.26 handle vs. USD.  If the Merkozy meeting produces positive results than this could quell the markets for a bit as the focus shifts to corporate earnings and the potential good economic story taking place here in the US.  So it may be risk-on again until the weekend where investors may want to lighten the load.

November 28, 2011

Beginning of the dollar pain trade?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:11 am

The USD is opening this weeks account a good deal weaker. Asian and Euro-bourses have rebounded from their biggest selloff in nearly two-months amid speculation policy makers are intensifying their efforts to contain “the” debt crisis.

For most of the weekend throughout Europe, the free press was reporting positive EUR actions. Yesterday, Germany’s finance minister suggested that the Euro-zone could rapidly implement changes to the Lisbon Treaty, allowing for significantly greater EC fiscal oversight of Euro area member countries. In theory, this would create a “Stability Union” before a deeper treaty change in the future. Elsewhere, in Italy, La Stampa, suggested that that the IMF would provide a €600b financing facility for Italy (this could only ever be EUR positive). Other news sources have since cited unnamed officials as saying that the report is not credible and that there are no discussions within the G7 of a large IMF package for Italy. However, that being said the story has nonetheless alerted the market to the possibility that some assistance might come from the IMF’s mission to Rome this week and the Eurogroup meeting.

The German newspapers have not been left out in the cold. They reported that the German government and five other EZ members, with triple “A” credit ratings, are considering issuing bonds. Part of the money raised would be used to provide financial assistance, under strict conditions, for Italy and Spain. Finally, the EFSF issued a new issuance strategy that would have it increase precautionary funding. The above reasons, remedies and excuses, have allowed the market to apply risk again, despite another rating agency, Moody’s warning that Euro area sovereign ratings are increasingly under threat. They noted that risk of multiple defaults by Euro area countries is “no longer negligible”.

There has been interest to sell EUR’s into this relief rally thus far, however, stop losses still lurk tight above 1.34+ that could fuel further short term gains. Bigger picture, confidence in the debt-embattled single currency remains “paper thin’ and many in Europe will already be eyeing tomorrows EUR+8b BTP (Italian) auction for euro-demand clues. The future of the Euro-zone remains hanging in the balance. The market cannot be fooled by month-end window dressing affecting the FX market over the remaining few session for November. The right-hand-side remains most vulnerable to the pain trade.

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Week in FX: Europe Nov. 20-25

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November 23, 2011

Weak German Bond Sale Increases Odds of Eurozone Breakup

Filed under: OANDA News — Tags: , , , , , , , — admin @ 12:50 pm

As evidenced by the poor showing for German bonds at today’s Bundesbank bond offering, it is obvious for all to see that the debt contagion tide is now threatening Germany’s coastline.

Of the 6 billion euros ($8.1 billion) in German sovereign debt offered for sale, nearly half was withdrawn due to lack of interest. For bonds that did attract buyers, yields were pushed higher; 10-year bonds alone rose four basis points to 1.96 percent. Not surprisingly, the euro struggled falling to $1.3350 by mid-morning in New York. Should weak demand and rising yields persist in future debt auctions, German officials will be forced to reconsider Germany’s place within the Eurozone.

Chancellor Merkel has publically and consistently maintained Germany’s commitment to the preservation of the Eurozone. Nevertheless, the Chancellor has not wavered on her demand that countries receiving emergency funding must also commit to bringing deficits in line with Eurozone membership rules. As seen with Greece in particular, this means the imposition of very unpopular government spending cuts and the introduction of new taxes and other fees to generate revenue.

Needless to say, those countries finding themselves in this position have not been keen on adopting these “austerity” requirements. After all, in one form or another, three European government leaders have fallen in recent weeks due to the backlash of the population forced to accept these stringent measures.

Be that as it may, Merkel continues to advocate for this approach while sharply condemning the creation of a “communal” Eurozone bond as recommended by some officials. The idea is that a bond backed by the entire Eurozone could be offered instead of individual sovereign debt in order to raise funds for those countries forced to pay exaggerated rates to attract investors.

But with today’s auction, this avenue may no longer be an option.

If German sovereign debt – the highest- rated of all the Eurozone countries – is indeed falling out of favor as suggested by today’s auction, how can bonds backed by the entire region, including the problem economies, expect to do better? More to the point, what does this new reality mean for the future of the Eurozone?

Make no mistake, Merkel has always understood that Germany’s economy was vulnerable to the malaise spreading through the periphery economies. This is precisely why the Chancellor has argued against participating in a Eurozone bond. But with the disappointing results of today’s auction serving as a warning, lawmakers may be forced to take a stronger stance to protect Germany’s interests even if this is detrimental to the Eurozone’s future prospects.

The ultimate form of control that Germany could take would be to withdraw from the Eurozone and return to its own currency. Legal issues and other concerns notwithstanding, a return to the deutsche mark would enable Germany to manage its own currency and remove itself from the debt crisis engulfing the Eurozone.

Some day we may look back at this auction as the one event that really marked the beginning of the end of the Eurozone.

October 17, 2011

Euro Down On Lowered Expectations!

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 8:05 am

The Euro started out the week with much hope and promise but that quicklly faded after German officials dampened the mood surrounding the Euro debt crisis talks.  Over the weekend, the G-20 voiced their own hope that Euro leaders would be able to come up with a plan by the end of the Euro summit taking place this week, but German officials don’t think that it’s possible.

The market looks to be in agreement as a short-term double top formed at 1.39 in EUR/USD (our target from last week’s Euro trade) and is moving lower as risk appetite is being trumped by risk aversion.  The next short-term target for Euro is 1.3675 vs. USD, just above the S2 daily pivot support.

September 14, 2011

Cracks Appear in Merkel’s Coalition as Debt Crisis Worsens

Filed under: OANDA News — Tags: , , , , , , , — admin @ 1:56 pm

Fears that Greece is heading towards an inevitable default have increased significantly in the past two weeks. And now it appears that as the likelihood of a default increases, the fate of Greece has driven a wedge between the two main parties in Germany’s coalition government headed by Chancellor Angela Merkel.

On Tuesday, comments made by German Vice Chancellor Philip Roesler who heads the Free Democratic Party painted Merkel into a corner. Merkel, whose Christian Democratic Party leads the government only through the support of the FDP, was forced into damage control when Roesler brought up the possibility of Greece defaulting and being forced out of the Eurozone.

“To stabilize the euro, there can no longer be any taboos,” Roesler wrote in an article for the German Newspaper Die Welt. “That includes, if necessary, an orderly bankruptcy of Greece if the necessary instruments are available.”

Merkel immediately went on the offensive to reassure markets already in panic following Monday’s deep sell-off. Merkel pledged that she personally, and the government as a collective, are in agreement that “everything must be done to keep the euro area together”.

Merkel went on to suggest that the loss of Greece would lead to a “domino effect” that would soon engulf other debt-ridden countries within the region.

Greece Expected to Miss Deficit Target

One of the main conditions Greece agreed to in exchange for emergency funding was to reduce its 2011 deficit by 7.6 percent. Progress on this objective is currently being reviewed by representatives of the “troika” comprised of the European Union, the International Monetary Fund, and the European Central Bank. The preliminary results of this audit are not encouraging.

The latest evaluation is that Greece will fail to meet its deficit reduction target. According to the auditors, this failure is due partly to a lack of effort on the part of the government, but also because the Greek economy contracted more than had been anticipated. The weaker growth resulted in lower revenues leaving a wider-than-expected budget shortfall.

The big question now of course is will the government’s apparent failure to meet its deficit goal affect the next financial aid payment of 8 billion euros (US$10.9 billion)?

At this time, most analysts believe Greece will still receive the next tranche as scheduled but it will surely come with a stronger warning that Greece must take its deficit reduction goals more seriously.

In addition to the deficit shortcomings, Greek officials will also be taken to task over their lackluster efforts to privatize a series of government-owned agencies. Again, in exchange for emergency funding from its Eurozone neighbors, Athens was expected to sell a series of government-owned agencies and use the money to reduce the operational deficit.

The scheme is expected to raise 1.7 billion euros (US$2.3 billion) by the end of the month, and another 5 billion euros (US$6.8 billion) prior to the new year. Publically, the government claims it is optimistic that it will meet these targets but the troika remains unconvinced.

It is commendable that Merkel acted so quickly to defuse the comments of her Vice Chancellor but in the end, this may prove to be little more than window-dressing. Greece is clearly not on track to contain its deficit and the likelihood of a default – no matter what Merkel says – is higher today than it was just two weeks ago.

Cracks Appear in Merkel’s Coalition as Debt Crisis Worsens

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 1:56 pm

Fears that Greece is heading towards an inevitable default have increased significantly in the past two weeks. And now it appears that as the likelihood of a default increases, the fate of Greece has driven a wedge between the two main parties in Germany’s coalition government headed by Chancellor Angela Merkel.

On Tuesday, comments made by German Vice Chancellor Philip Roesler who heads the Free Democratic Party painted Merkel into a corner. Merkel, whose Christian Democratic Party leads the government only through the support of the FDP, was forced into damage control when Roesler brought up the possibility of Greece defaulting and being forced out of the Eurozone.

“To stabilize the euro, there can no longer be any taboos,” Roesler wrote in an article for the German Newspaper Die Welt. “That includes, if necessary, an orderly bankruptcy of Greece if the necessary instruments are available.”

Merkel immediately went on the offensive to reassure markets already in panic following Monday’s deep sell-off. Merkel pledged that she personally, and the government as a collective, are in agreement that “everything must be done to keep the euro area together”.

Merkel went on to suggest that the loss of Greece would lead to a “domino effect” that would soon engulf other debt-ridden countries within the region.

Greece Expected to Miss Deficit Target

One of the main conditions Greece agreed to in exchange for emergency funding was to reduce its 2011 deficit by 7.6 percent. Progress on this objective is currently being reviewed by representatives of the “troika” comprised of the European Union, the International Monetary Fund, and the European Central Bank. The preliminary results of this audit are not encouraging.

The latest evaluation is that Greece will fail to meet its deficit reduction target. According to the auditors, this failure is due partly to a lack of effort on the part of the government, but also because the Greek economy contracted more than had been anticipated. The weaker growth resulted in lower revenues leaving a wider-than-expected budget shortfall.

The big question now of course is will the government’s apparent failure to meet its deficit goal affect the next financial aid payment of 8 billion euros (US$10.9 billion)?

At this time, most analysts believe Greece will still receive the next tranche as scheduled but it will surely come with a stronger warning that Greece must take its deficit reduction goals more seriously.

In addition to the deficit shortcomings, Greek officials will also be taken to task over their lackluster efforts to privatize a series of government-owned agencies. Again, in exchange for emergency funding from its Eurozone neighbors, Athens was expected to sell a series of government-owned agencies and use the money to reduce the operational deficit.

The scheme is expected to raise 1.7 billion euros (US$2.3 billion) by the end of the month, and another 5 billion euros (US$6.8 billion) prior to the new year. Publically, the government claims it is optimistic that it will meet these targets but the troika remains unconvinced.

It is commendable that Merkel acted so quickly to defuse the comments of her Vice Chancellor but in the end, this may prove to be little more than window-dressing. Greece is clearly not on track to contain its deficit and the likelihood of a default – no matter what Merkel says – is higher today than it was just two weeks ago.

China Willing to Buy Euro Debt – With Conditions

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 12:04 pm

National Development and Reform Commission Vice Chairman Zhang Xiaoqiang expanded on earlier comments in an interview earlier today. Zhang said that China is prepared to buy sovereign debt from European countries but governments must address deficits and demonstrate they are committed to greater fiscal responsibility.

Premier Wen Jiabao first hinted that China is willing to “offer assistance” but:

“Countries must first put their own houses in order,” Wen said. “Developed countries must take responsible fiscal and monetary policies. What is most important now is to prevent the further spread of the sovereign debt crisis in Europe.”

Source: Bloomberg

September 7, 2011

Eurozone Engine Stalls; German Court Rules Bailouts Legal

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 1:48 pm

Yesterday’s announcement that factory orders in Germany plunged 2.8 percent in July sent shockwaves through the Eurozone. The poor showing had investors scrambling on fears that Germany may no longer be in a position to serve as the “engine” to power the region’s recovery.

By the end of the trading day the euro had declined by more than one percent to close below the $1.40 mark for the first time since the middle of June. European stock markets were in decline as well with the DAX paring a full percent in value on Tuesday while the CAC 40 and STOXX 50 both lost 1.13 percent and 1.28 percent respectively.

Eurostat, the European Union’s statistical office, noted that Eurozone growth fell largely because of the “poor performances” of the region’s two largest economies, France and Germany. According to Eurostat, France recorded no growth in the quarter while Germany could only manage a very disappointing 0.1 percent improvement.

Eurozone Engine Has Stalled

The weakened state of the economy has not been lost on businesses or consumers. For the month of August, German business confidence fell to a four-month low while the consumer confidence index is set to retreat to the lowest level in a year; worse still, there is a greater sense that the weak results for the quarter are merely the start of a longer trend.

The total of the rescue packages provided so far amounts to about 300 billion euros (US$422.1 B) of which Germany – as the region’s largest economy –has provided roughly 25 percent. This has caused a backlash at home for Chancellor Angela Merkel and it is only through great effort that the Chancellor has managed to garner sufficient support to keep the coalition government onside with her efforts to prevent a Eurozone member default.

This task has likely become more difficult in the wake of today’s ruling on the legality of participating in the provision of the emergency bailout packages.

German Court Rules Bailouts Are Legal

Earlier this year, a handful of disgruntled German politicians opposing the use of taxpayer money to bailout other sovereign nations turned to the courts for a ruling on the legality of the bailout deals. At the heart of this legal challenge was the European Union’s “no bailout” clause intended to force all member countries to abide by the deficit and total debt limitations required for acceptance into the Eurozone membership.

The ruling was delivered earlier today and while the actions were found to be legal, the court did add new conditions to future payments. Chief amongst these new rules is the requirement that will force Merkel to gain approval from the German parliament’s budget committee before Germany can contribute to the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM) planned for 2014.

While this ruling does clear the way for Germany to continue to act as the leading sponsor for the EFSF, it does raise the possibility that the budget committee may deny Merkel permission to contribute to the bailout funds. Should this happen, there is a strong likelihood that both funds will fall far short of their targets leaving insufficient funds to prevent a Eurozone member default.

Gold Sells Off On German Court Decision!

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 8:09 am

The safe-haven properties of gold have been invoked by the market for some time now, but especially after Switzerland has attempted to close for business.  As fewer safe-havens options become available, gold becomes the beneficiary.  Safe-haven demand has been near its highs of late, as problems with the Euro debt crisis persist and linger.

However, one major hurdle was cleared today, as the German couts ruled that Germany could indeed participate in the bailouts of the periphery countries, paving the way for confirmation of the expanded ESFS.

This helped send gold lower from highs in the 1900s as some of the risk aversion in the market abated.  However, don’t be lulled into thinking that the Euro problems have gone away, as this is merely one hurdle that needed to be cleared of many.

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