Forex Blog

October 14, 2011

Week in FX: EUROPE Oct. 9-14

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 11:19 am

Friday’s strong North American data is providing the backdrop for a more supportive risk environment. But, its the G20 meeting that brings hope and optimism to resolving the Euro-zone crisis. Let’s hope investors will be full of the same optimism come Monday morning.

In reality, until there is a clear resolution to the European situation, the risks to global growth remain to the downside. France and Germany believe that they are moving closer on a comprehensive package to stabilize the Eurozone. The package includes maximizing the force of the EZ bailout fund and finding a solution for Greece.

Some of the currency swings have investors believing that a ‘stability road map will be implemented soon’. Both France and Germany hold the key to resolving the all important question of how to boost the EFSF fund without demanding further contributions from other nations. It will be an interesting weekend of debates.

Below are some of the highlights of the week:


EUROPE

  • EUR: After Sarkozy and Merkel’s Sunday meeting both Germany and France again pledged plans to stabilize Europe by end-October. Both leaders reached an agreement on a comprehensive package of measures to stabilize the euro area by the 3 November G20 meeting. This includes recapitalization of European banks.
  • EU: France, Belgium and Luxembourg approved a plan to bail out a troubled European bank (Dexia).
  • FR and ITL: French and Italian IP surprised to the upside. Italian IP rose +4.3%, m/m, in August vs. the consensus forecast for +0.2%. French IP rose +0.5%, m/m, above the expectation for a -0.7% fall. Gains in both countries were broad based.
  • SEK: Swedish IP fell -3.1%, m/m in August, much weaker than the consensus expectations for -1.5%. With prior downward revisions the annual growth decreased to +5.6%, y/y, and short of the forecast for 10%. Euro growth core deterioration bodes ill for Swedish manufacturing.
  • NOK: Norway’s inflation rose to +1.6%, y/y, in September from +1.3%. Analysts believe inflation will start to gradually decrease at the turn of the year. Market expects Norges Bank to remain on hold this year.
  • UK: Manufacturing remains weak in August. Overall industrial production rose +0.2%, m/m, in August, above the consensus forecast for a -0.2% fall, primarily driven by gains in the mining and oil sectors. Meanwhile, manufacturing production fell -0.3%. With negative revisions to July data, manufacturing has now been contracting for three months in a row. Continued weakness going into next year is likely to spark expectations of a possible further extension of QE
  • UK: RICS house price index was unchanged at -23 in September versus the consensus expectation of a deterioration to -24.
  • SEK: Headline inflation moderated to +3.2%, y/y, from +3.4%. Core-inflation moderated to +1.5%, y/y, from +1.6%, and in line with consensus forecasts. Euro core deterioration in growth obviously will have an ill adverse effect on the manufacturing intensive Swedish economy.
  • EUR: Slovakia parliament rejects enhanced Euro rescue fund first vote. The vote ‘was used as a power tool amid a coalition crisis and the whole of Europe was taken hostage’. Government collapsed. Second vote passed end of week. All members now ratified the amendments to EFSF fund.
  • EUR: Mid-week risk gains saw the EUR rally +1% and AUD +1.7% in the week hours on Wednesday, buoyed by the increasing prospects for a Euro bank recapitalization plan alongside better than expected European IP data.
  • EUR: Euro area IP rose +1.2%, m/m, in August, much higher than the forecast for a -0.8% decline, thanks to upside surprises in France and Italy.
  • EUR: In the periphery, Ireland reported a strong +4.4%, m/m gain in production.
  • FT: Reported that a new round of stress tests will be performed assuming haircuts on sovereign bonds and forcing banks to raise capital in the market or accept government infusions if they are deficient relative to a new, higher capital ratio (+9%).
  • UK: Jobless claims rose +17.5K last month after a +19K rise in August. The trend points to continued deterioration in UK labor market conditions. From June to August, employment fell -178K (worst three-month fall in two-years). Unemployment rate is now a new high of +8.1%.
  • ITL: Successfully auctioned 14,10, and 7-year bonds, with bid-to-cover ratios in line with recent averages. ECB bought Italian and Spanish paper, but not in sufficient size to influence yields lower. Stability in Italian financing costs is important for maintaining upward trajectory in European financial market sentiment.
  • UK: Trade deficit narrowed to £7.8b in August from £8.2b, beating the consensus forecast for £8.8b. Analysts note that the UK economy might be beginning to capitalize on the weaker pound.
  • FT: Reported that EM countries are working on ways to contribute money to expand the lending capacity of the IMF, by either funding an SPV or lend to the IMF by buying special bonds to shore up credit markets.
  • EU: EZ headline inflation came in line with the initial estimate at +3.0%, y/y. The ‘core’ was a tad higher than expected at +1.6%, y/y vs. +1.5%. The increase was driven by changes in methodology and the VAT rise in Italy. Higher core and headline inflation continues to create uncertainty with ECB policy expectations.

June 17, 2011

Forex Week in Review June 12-17

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:59 am

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”
-Yanis Varoufakis

Below are some of the highlights of the week:


EUROPE

  • Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
  • UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
  • S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
  • UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
  • Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
  • Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
  • Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
  • UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
  • SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
  • UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
  • Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

  • US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
  • US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
  • An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
  • US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
  • CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
  • The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years.
  • US weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor.
  • US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
  • US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
  • CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
  • Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

  • NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
  • China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
  • Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
  • Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
  • PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
  • BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
  • RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

Forex Week in Review June 12-17

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 10:59 am

Markets are ending the week on firmer footing. The meeting between Merkel and Sarkozy and the news of a new Greek cabinet is supporting the EUR. The German Chancellor has agreed to compromise and work with the ECB on a debt plan for Greece. Supposedly, they will use a ‘Vienna-style’ voluntary debt rollover as the framework. The Greek PM Papandreou has formed a new cabinet, setting the stage for a confidence vote in parliament next week. Market uncertainty remains. No one knows the depth and scope for ‘the’ rollover agreement. The European finance ministers resume their talks on the second bailout package for Greece this Sunday.

“When you are insolvent you do not solve things with new and larger loans”
-Yanis Varoufakis

Below are some of the highlights of the week:


EUROPE

  • Italian IP was strong in April with a +1.0%, m/m rise, well above the +0.2% expected and pushed the annual growth rate of industrial production to +3.7%, y/y from +3.4%.
  • UK headline inflation was stable at +4.5%, y/y in May. Core inflation subsided to +3.3%, reversing the exceptional spike to +3.7% last month. Transport services, the main cause, fell -5%.
  • S&P’s added to Greece’s woes, cutting its long term sovereign rating three notches to CCC, citing, a ‘significantly higher likelihood of one or more defaults’.
  • UK RICS house prices fell to -28 in May from -21. Analysts note that weak data and softer inflation continue to argue against a hawkish turn in the BoE policy stance.
  • Swedish inflation stayed stable at +3.3%, y/y in May, while core inflation moderated a touch to +1.7%, y/y from +1.8%. Market believes its in line with Riksbank’s expectations and that they will continue to raise interest rates.
  • Tuesday, EU finance ministers ended their first meeting with little evidence of progress in agreeing on a framework for private sector involvement in the Greek rescue. Meet again this Sunday.
  • Euro-zone IP grew +0.2%, m/m vs. expectations for a -0.2% decline. March was revised upward to flat from the -0.2% m/m fall. Strength was driven by Italy, Finland and Luxembourg, offsetting the -0.6% m/m fall in Germany and the -0.3% fall in France.
  • UK labor report disappointed with a spike in jobless claims to almost +20k, above the +6k consensus. Weekly earnings were weak at +1.8%, y/y, down from +2.3%. No reason for the BoE to turn less dovish.
  • SNB kept rates on hold, maintaining a relatively dovish tone in the policy statement. Growth forecast unchanged at +2%, y/y. Inflation forecast for 2013 was revised lower to +1.7%, y/y, from +2.0%. The franc strength is the reason behind lower inflation forecasts from 2012.
  • UK retail sales ex-autos fell -1.6%, m/m, in May with the year-on-year growth rate now reduced to 0%. The weak wages and money growth reported earlier are likely to pull down inflation.
  • Euro-zone final CPI for May was unrevised from the flash estimate of +2.7%,y/y. Core inflation also moderated slightly to +1.5%, y/y, from +1.6%. Lower energy inflation was the main reason behind the softer headline.

Americas

  • US Retail sales (-0.2%) fell last month for the first time in eleven-months as receipts at auto dealerships dropped sharply, but the decline was less than expected (-0.6%), and provided investors some optimism of a pickup in economic activity in the second half of the year.
  • US CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%.
  • An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5.
  • US TIC data showed that net foreign purchases of long term securities rose from +$24b to +$30.6b last month. China has added $7.6b to its net-treasury holdings.
  • CAD manufacturers saw sales slip -1.3% in April, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.
  • The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years.
  • US weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor.
  • US May house starts rose + 3.5% to +560k. Giving a better performance was US May permits, rising +8.7% to +612k.
  • US current account deficit rose in the 1st Q (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum,
  • CAD Wholesale sales edged down -0.1% to $46.8b in April, following a +0.3% gain in March.
  • Confidence among US consumers dropped more than forecasted in June (71.8 vs. 74.2) as households contended with higher prices that are eating into incomes amid slowing job growth.

ASIA

  • NZD suffered more earthquakes in Christchurch, causing some damage to roads and structures in residential areas of the city.
  • China reported that new loans totaled CNY551b in May, much lower than the consensus forecast for CNY650b and down from the CNY739.6b in April. Loans are 12% lower ytd than last year and 39% lower than in 2009. This would suggest that Chinese policy tightening is beginning to take hold.
  • Growth in Chinese industrial output (+13.3%) and fixed asset investment (+25.8%) remains robust and above market expectations, while retail sales (+16.9%) was modestly below expectations.
  • Chinese CPI inflation was at a three-year high of +5.5%, y/y in May. The rise in services inflation continues to offset the slowing of momentum in food inflation
  • PBoC hiked the commercial banks’ reserve requirement ratio (RRR) +50bp, that is a cumulative +550bp since the cycle began. Rate is now at +21.5%.
  • BoJ announced the creation of a small new lending facility, adding 500b yen to its existing 3-trillion yen facility that provides loans to banks at +0.1% for on-lending.
  • RBA Governor Stevens reiterated a bias to raise the policy rate in the medium term and acknowledged that the slightly restrictive monetary policy and fiscal policy are currently constraining the economy. He reiterated that inflation is still more likely to rise than fall despite the gains in the AUD and that further rates rises are need to curb price increases.

May 6, 2011

Forex Week in Review: May 1-6

Filed under: OANDA News — Tags: , , , , , , , — admin @ 12:40 pm

It was a week many would like to forget. A week of surreal price movements across all asset classes. The perfect storm of price movement, with investors exiting the one directional, inflation premium commodity trade with gusto, after the CME cost hiking, the rumors of a Soros fund exiting ‘the’ trade and a less hawkish Trichet omitting the code words ‘most vigilant’ from his communique. Now the market has to endure European finance officials in Luxembourg for an unscheduled meeting as rumors of Greece possibly wanting to leave the Euro zone has market sentiment remaining on the defense at week’s end. Below are some of the highlights of the week:


EUROPE

  • Euro area manufacturing PMI data for April was revised higher from 57.7 to 58.0, above expectations set for a flat 57.7 reading. The data is consistent with strong growth and provides a comforting outlook on the sector, especially in the light of the stagnant recent Ifo reading.
  • Swiss SVME PMI indicator fell unexpectedly to 58.4 from 59.3 last month, while markets were looking for a 59.8 reading.
  • Swedish PMI surprised to the upside in April, rising from 58.6 to 59.8 m/m with consensus set at 58.5.
  • Unlike Norway who had a sharp downward PMI revision, as the headline fell to 55.6 from 57.4.
  • UK manufacturing PMI badly disappointed with a drop to 54.6, the lowest level since last September. The market expected a 57.0 print and, to make matters worse, the March reading was revised down from 57.1 to 56.7. With a weak domestic orders component, does not bode well for growth momentum going into second quarter.
  • In Sweden, the Riksbank’s minutes confirmed the very hawkish stand of the executive board.
  • Portuguese/German 10-year spreads have tightened on news of agreement on an aid package between the Portuguese caretaker government and EU institutions. The deal still has to be approved by the Portuguese opposition and the EU governments.
  • The Euro-zone services PMI was revised down slightly to 56.7 from the preliminary 56.9, coupled with the upward revision to manufacturing PMI, leaves the indicator on firm footing.
  • UK construction PMI came in at 53.3, well below the 55.9 expected. Money supply data remained soft, the preferred measure of money supply for the MPC, the three-month annualized rate of M4 ex-intermediate OFCs eased to +1.0% from +1.7% in February.
  • UK services dropped to 54.3 in April from 57.1 in March, well below the 56 consensus forecast. With all UK PMI surveys (manufacturing, construction and services) sharply lower this week points to sluggish growth entering the second quarter. This should keep the BoE dovish.

  • German factory orders surprised the market with a sharp drop of -4% m/m in March with February print revised lower to +1.9% from +2.4% previously and pushed the annual growth rate to only +9.7% y/y, down from 19.6% in February.
  • German industrial production beat expectations rising +0.7%, m/m vs. +0.5%.
  • UK PPI printed higher than expected, with the output PPI rising +5.3%, y/y last month vs. +5.1% forecasted. Perhaps higher commodity prices might be starting to filter through.

  • Both the BoE and the ECB held rates steady at +0.5% and +1.25% respectively. Trichet’s well documented less hawkish tone had the market pricing out near term inflation premium.
  • In Norway, manufacturing production printed stronger than expected at +0.9%, m/m, vs. expected +0.6%. The annual rate accelerated to +3.0%, y/y from +2.0% in February.

Americas

  • In Canada, Prime Minister Harpers Conservatives won a ‘majority’. To date, the Tories have pursued policies that have been fairly friendly to the CAD.
  • US Treasury Secretary Geithner reiterated that global economies would benefit if China allowed its ‘substantially undervalued’ currency to strengthen. Expect more rhetoric to seek the appreciation of the Yuan ahead of the US-China Strategic Economic Dialogue next week.
  • US manufacturing slowed last month (60.4), but not as much as expected (59.5). However, rising costs remain a problem (85.5). The ISM report contrasts the Fed’s regional surveys which show that manufacturing expanded in April. Manufactures continue to experience significant cost pressures from commodities.
  • US factory orders climbed for a fifth consecutive month in March (+3%). A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain.
  • US ADP’s estimate of +179k for private non-farm payroll growth fell short of market expectations (+200k). On the plus side, March data was revised higher by +6k to show a gain of +207k jobs.
  • The much weaker than expected US ISM non-manufacturing data has given the investor another reason to be concerned about the US economy and further justifying the Fed’s ‘extended’ monetary policy. The ISM plunged 4.5 points to 52.8 in April, well below expectations (57.4).
  • US weekly initial claims jumped to +474k, up from the previous weeks +431k. As long as the headline number stays above +400k, this would imply a slower recovery than the Fed would like.
  • US Non-farm productivity rose at a +1.6% rate in the first quarter, beating the streets estimate of +1.1%. The preliminary estimate of hourly compensation (+2.7%) was half-a-percentage point higher, boosting the estimated growth rate of unit-labor costs to +1.0% versus a decline of 1.0% in the fourth quarter.
  • Canadian Ivey PMI came out at 57.8, unadjusted 57.7, plummeting from 73.3 last month, has added some pressure to the ‘risk off’ tone mid-week.
  • March’s Canadian building permits came in much stronger than expected, with a massive +17.2% increase after a strong +9.8% gain in February.
  • NFP expanded by +244k last month, the biggest gain in a year, after a revised +221kincrease the prior month. The jobless rate climbed to +9% (first increase since November).
  • Canadian employers added a net +58.3k jobs in April after a decrease of -1.5k in the previous month. The jobless rate unexpectedly dropped to +7.6%.

ASIA

  • China’s April PMI fell -0.5 points to 52.9 with new orders falling -1.4 points to 53.8. Some proof that China’s economy is decelerating amid rising financial stress for non state owned companies, wide spread labor shortages, and emerging power interruptions. Does the weaker data curtail policy tightening?
  • As expected, the RBA left their rate policy on hold (+4.75%). Their following communiqué was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation. Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. However, he went on to say that ‘the marked decline in underlying inflation from the peak in 2008 has now run its course.
  • The Reserve Bank of India hiked policy rates +50bps to +7.25% and +6.25%, respectively on the repo and reverse-repo, more than the consensus forecast for +25bps.
  • New Zealand building permits rose only +2.2% m/m in March after the sharp fall of -9.8% m/m in February.
  • Japan Finance Minister Noda went out of his way this week to distinguish the current yen movement from the pre-intervention period. He noted that the moves stem from weakness in the dollar, not from yen strength.
  • New Zealand reported a higher than expected +1.4% q/q rise in employment in the first quarter.
  • Australian retail sales were weak in March, down -0.5% m/m vs. an expected +0.5% gain.
  • The RBA’s Monetary Policy Statement also emphasized the possibility for further policy divergence. The statement came in more hawkish than market expectations of forecasts remaining unchanged. Policy makers indicated that market pricing of one hike over the year ahead (to May 2012) is not enough. Inflation is expected to be above its +2-3% target band by end 2013.

WEEK AHEAD

  • Market gets trade numbers down-under from the Aussies, far-east from China and North America
  • Inflation indicators from the UK, China and the US
  • The Aussies give us employment, the US weekly claims
  • After US Sales data we end the week with consumer sentiment

August 13, 2010

EU Growth expands

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 10:37 am

Europe’s economy expanded more than economists forecast in the second quarter as the fastest growth in Germany in two decades powered the region’s recovery.

Gross domestic product in the 16-nation euro area increased 1 percent from the first quarter, when it rose 0.2 percent, the European Union’s statistics office in Luxembourg said today. That’s the fastest in four years and exceeded economists forecast for 0.7 percent growth, based on the median of 33 estimates in a Bloomberg News survey. Exports rose a seasonally adjusted 5.2 percent in June from May, a separate report showed.

Reviving global growth helped the euro-area economy gather strength after the Greek budget crisis forced governments to step up deficit-cutting measures. Germany, Europe’s largest economy, grew in the quarter at the fastest pace since reunification. The Stoxx 600 Index has gained 10 percent from an eight-month low in May, helped by a European backstop for indebted nations and the results of stress tests on banks.

“Germany is definitely the powerhouse of the euro area, driving the better-than-expected expansion,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. Still, “we’re probably past the best in terms of economic recovery and will see weaker growth rates in the third and fourth quarters.”

From a year earlier, euro-area GDP rose 1.7 percent after increasing 0.6 percent in the first quarter, today’s report showed.

Bloomberg

June 1, 2010

Is the Plan to Save the Euro Working?

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 7:54 pm

It has been just under a month since the EU and the International Monetary Fund came through with a trillion dollar lifeline to prevent the malaise in Greece from spreading to the rest of Europe. Is it working?

Like everything having to do with the EU right now, the answer depends on whom you ask. Providing emergency funds to Greece at what amounted to the 11th hour, ensured Greece could meet a looming repayment deadline. Without the backing of the EU, Greece would have had no choice but to default, and there is no telling what damage would have resulted. Several other countries in a similar situation, seemed to finally grasp the seriousness of the predicament and have implemented self-imposed “austerity” programs to reduce spending in a bid to reign in their own burgeoning deficits.

Despite these first, tentative steps towards economic responsibility, it is obvious that investors are not yet convinced crisis has been averted. The euro continues to lose value on a daily basis, and is near a four-year low; global stock markets are also in freefall with no reversal in sight. In fact, ratings agent Fitch Ratings, is so bearish on some eurozone countries, it recently demoted Spain’s credit rating to AA+ from AAA.

In addition, cracks are starting to appear in the eurozone foundation as the EU splinters into two factions – those desperately in need of money to prevent total collapse, and those forced to contribute to the emergency fund in order to protect their own economies. So, is the plan to save the euro working? You be the judge.

At the beginning of the year, the euro was trading at US$1.4369, but has been on an almost straight-line decline since then. By June 1st, the euro was down 18.6 percent to 1.2112. So strong is this downward trend, that when the EU announced that it had come to terms on a bail-out plan, the news caused barely a ripple. Traders paused for all of a second or two before redoubling their efforts to short the beleaguered currency.

The reason for this is simple. The massive injection of cash may have prevented an immediate collapse, but it does nothing to address the fundamental problems that cultivated the crisis in the first place. Investors definitely understand this and from this perspective, they are giving the bail-out plan a failing grade.

Rules, What Rules?

To understand how the debt crisis came to be, you must first understand how several of the eurozone members routinely flouted spending rules intended to hold the line on individual sovereign debt. All countries are required to prevent total debt obligations from exceeding 60 percent of Gross Domestic Product, while annual government deficits are similarly capped at 3 percent of GDP. Currently however, only two countries – Luxembourg and Finland – are in full compliance.
 
So how is it that 14 of the 16 eurozone nations were allowed to continually ignore the rules? It probably comes down to a combination of lax enforcement, combined with a bit of old-fashioned deception that allowed this practice to go on for so long. For example, it was recently revealed that billions in debt was hidden (I’m looking at you, Greece) using currency swaps to obscure the true level of indebtedness. By exchanging foreign debt denominated in dollars and yen for euros, at what could only be described as a “fantasy” exchange rate, Greece received far more euros than the combined debt was really worth. This exchange rate trickery enabled Greece to show a grossly inflated balance sheet. Of course, when the time came to repay the debt, Greece had spent the euros it received in the original transaction, and was unable to come up with the cash to meet the new debt obligation.

This is just one example of how a determined eurozone country was able to circumvent the (nudge, nudge, wink, wink) debt rules. Historically, little has been done to deal with serial offenders and as Olli Rehn, Economy Commissioner for the EU told reporters in early May, there has been a long-standing “chronic failure” of several countries to comply with eurozone budget requirements. I would suggest that there is a similar long-standing “chronic failure” on the part of EU authorities to police the actions of member states.

On a final note on this topic, all eurozone countries were issued with a “free pass” during the recession as governments spent billions in various stimulus schemes to prop up their respective economies. While this may indeed have fallen under the guise of “extenuating circumstances”, it would appear that ignoring budget regulations has indeed become standard procedure.

Potential for Social Upheaval

To address the larger problem of severe overspending, governments are looking high and low for areas where they can trim spending. Most citizens paid from the public purse, and even those on state-sponsored pensions, can expect wage freezes, while many will face pay cuts. Almost all citizens will pay considerably higher taxes.

For those living in countries where “cradle to the grave” government care is seen as a basic entitlement, the shock of losing this level of attention, will be pronounced. The truth is however, governments can simply no longer afford to spend at the current rate, but many chose to willfully ignore this reality.

Predictably, organizers were quick to call for action resulting in large-scale demonstrations and riots as people in Greece took to the streets to protest the loss of government-sponsored programs. Sadly, this violence could be simply the tip of the iceberg as further spending cuts are unfurled across the region. The added instability arising from street demonstrations is the last thing cash-strapped governments in the eurozone need to face right now in what is sure to be a long, hot summer in Europe.

May 12, 2010

Europe Economy Grows Faster than Forecast

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Growth in the largest Eurozone members (Germany, France and Italy) overcame the contraction in Greece. It remains to be seen if this trend can continue for the next quarter or if the countries contracting outweigh the gains of other members.

Gross domestic product in the 16 euro nations rose 0.2 percent from the fourth quarter, when it remained unchanged, the European Union’s statistics office in Luxembourg said today. Economists had forecast growth of 0.1 percent, the median of 31 estimates in a Bloomberg survey showed. Industrial production gained 1.3 percent in March from February, when it rose 0.7 percent, a separate report showed.

The euro-area economy may gather strength after European leaders earlier this week pledged a rescue package worth almost $1 trillion to counter a spreading Greek debt crisis and restore confidence. Concern about governments’ ability to tackle their deficits has pushed down the euro 11 percent against the dollar this year, helping bolster the region’s export-led recovery.

Bloomberg

Canadian Trade Surplus Narrows in March

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Canada’s merchandise trade surplus unexpectedly narrowed in March, as prices for energy exports fell and industrial goods imports rose the fastest since 1992.

The surplus shrank to C$254 million, Statistics Canada said today in Ottawa. The result was smaller than forecast by any of 19 economists in a Bloomberg Survey, which had a median surplus estimate of C$1.6 billion.

Canada has returned to trade surpluses this year after the global recession triggered the first deficits since 1976 amid slumping automobile production and commodity prices. The Bank of Canada may become the first Group of Seven central bank to raise interest rates on June 1, yields on interest-rate futures show, after the country had economic growth and inflation faster than Governor Mark Carney had predicted.

Bloomberg

Estonia Still on Track for Euro Adoption

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A bit of surprising news out of Estonia, as the ECB has backed the Euro hopeful with the lowest debt as percentage of GDP but the 4th largest inflation which will not sit well with the Bundesbank.

European policymakers put Estonia on track to adopt the euro in 2011, even as the European Central Bank warned that the Baltic state may struggle to keep inflation under control.

The European Commission said Estonia, a one-time Soviet satellite that joined the European Union in 2004, passes the economic tests to become the euro’s 17th member. It called Estonia’s progress in reducing inflation “sustainable” in a report in Brussels today.

In a separate judgment released simultaneously in Frankfurt, the ECB said Estonia’s conquest of price pressures reflects “temporary factors” and “it may be difficult to prevent macroeconomic imbalances, including high rates of inflation, from building up again.”

Bloomberg

March 16, 2010

EU Reluctantly Rides to Greece’s Rescue

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It has been eleven years since the formation of the Euro Zone. At the time, noted economist Milton Friedman stated that the Euro Zone would collapse upon facing the first major crisis that pitted the interests of one country, against those of another. More and more, it appears that the Greek debt crisis could be the very incident that Freidman predicted.

The Euro Zone is comprised of EU countries that use the euro as their official currency and several financial obligations must be met in order to gain membership. These include limiting yearly deficits to 3 percent of the country’s GDP, while ensuring that accumulated debt remains equal to or less than 60 percent of GDP. EU policy also states that individual countries are responsible for their own economic fate, and the EU as an entity will not provide emergency funding to individual countries.

As the true seriousness of Greece’s economic crisis becomes known however, there is growing evidence that, even as part of the first-wave of Euro Zone countries back in 1999, Greece was never in compliance with the debt and deficit requirements. What was initially passed off as a little “creative accounting”, is now being seen as deliberate fraud and corruption. Needless to say, the thought of using taxpayer money to rescue Greece in light of these revelations, is not being well received in other EU countries – several of which have already tightened their own belts to get their financial houses in order.

Despite these public grumblings, and even official EU policy preventing the bailing-out of individual countries, EU finance ministers put the finishing touches on a plan to save Greece earlier this week. In truth, this is not just about Greece – it is really about preserving the currency. The euro has suffered a decline in the past two months of nearly 5.5 percent as questions linger over Greece’s solvency.

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker reported following a meeting of EU finance ministers.

There is a fine distinction to be made here – “in the event” the rescue is needed. The official EU line is that Greece is still responsible for implementing the changes necessary to balance the books herself and an EU-led rescue is a last resort. To date, Greece has agreed to a series of tax increases and spending cuts expected to total €4.8 billion (US$6.6 billion).

The EU finance ministers fully intend to hold Greece’s feet to the fire before sending any publically-funded relief. Many officials believe this crisis is entirely of Greece’s own making and is the result of a long history of government and corporate corruption.

“The objective would not be to provide financing at average Euro Zone interest rates, but to safeguard financial stability in the euro as a whole,” read a statement issued by the EU financial ministers.

Currency Blackmail

And there you have it. The ministers feel they have no choice but to support Greece in order to protect the euro itself. Blackmail may not be the polite term to describe the proceedings, but it remains the most apt depiction nonetheless.

Nowhere is the backlash against a taxpayer-funded bail-out more acute than in the Euro Zone’s largest economy. The German populace is decidedly against providing funds to Greece, and is in no mood to play the role of the benevolent financier to a country it feels is incapable, or worse still, unwilling, to manage its own economy.

This sentiment was succinctly captured in the words of Germany’s Finance Minister Wolfgang Schaeuble. In a veiled warning to the other “PIIGs” countries (Portugal, Italy, Ireland, and Spain), Schaeuble last week called for the “expulsion” of heavily-indebted countries from the Euro Zone.

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