Greece’s principal political parties are supposedly meeting with Prime Minister Papademos this morning to discuss austerity measures negotiated with the EU/IMF Troika. In political reality they are expected to be endorsed, if not, the EUR has a long way to fall. PSI discussions continue in tandem and are the other element necessary before the next installment of bailout funds can be advanced. Everyday the Greek default date next month gets closer and it will not be come down to who ‘flinches’ first. A section of the market already believes a PSI deal has been agreed, uncertainties will remain over the actual level of bondholder participation and it will be this that will create further market stress over the coming weeks.

It’s probably not a stretch to believe that the EUR will consolidate in this range 1.3230-1.3320 ahead of the ECB meeting tomorrow. It seems that the market believes that dips provide a good buying opportunity. All week, the hopes for Greek closure, not foreclosure, has had leveraged players, speculative bids and reserve managers jump on the EUR happy train. It is this that has helped the currency pair to run stops above some significant resistance levels. Now, its wait and see time again. What will Draghi say?

As for the BoE, sterling is naturally expected to underperform or lag its Commonwealth currencies (AUD, CAD, NZD etc) despite printing a three-month high, as investors position themselves ahead of tomorrows BoE meeting. Concerns about the possibility of extending the central banks asset-purchase program is likely to mute some of Cables gains in this ‘risk-on’ environment. Be careful, the possibility of more aggressive easing by King and company could add to the upside risk of the EUR on the cross.

Other Links:
EZ debt crisis infographic

Along with a rise in risk appetite influenced by a ‘whisper’ that a Greek debt deal is imminent, has the EUR testing against its upper range. In truth, it’s difficult to find a diehard Bull amongst us. The market psyche has us believing that most EUR positive moves are supposedly an excellent opportunity to add to the record short positions. These EUR short squeezes are to be treated as an opportunity-no action taken and it becomes a cost! The weak bears certainly hope so.

A successful conclusion to the PSI talks as “promised and expected” will not be the end of the matter-negotiations will remain ongoing. Why? The haircuts being discussed (around 70%) naturally will meet “with very unsatisfactory participation from the perspective of Greek and Euro/IMF authorities for forward looking debt sustainability.” Greece is likely to legislate Collective Action Clauses into the outstanding debt. The objective would be, once legislated, they can be used more coercively to force participation in the restructuring process-In English, whatever is agreed upon, there will be more negotiations required. The nightmare does not end with a successful PSI announcement.

Given that there are so many technical details to be worked out, maybe the market is not fully reflecting the difficulties that are likely to be associated with completing the Greek rescue package. For now, data showing that contraction in the Euro-zone factory activity last month (48.8 vs. 46.9) has slowed is supporting the single currency. Germany remains the outlier, the only country registering a reading above 50, indicating expansion. No matter, investors will wait for the promised Greek PSI agreement before outright celebrating. So, is it buy the rumor sell the fact time now?

Other Links:
Record Eurozone Unemployment Pits North Against South

Yields along the curve are trading higher for different reasons. The shorter end, out to 5’s, has seen more profit taking by market participants, one day after Bernanke and company pledged to keep short-term interest rates “exceptionally low,” at least until late 2014. At this weeks FOMC meeting, policy makers indicated that they are extending their low rate policy for another 18-months. Currently, futures prices see lower odds of an early 2014 hike, before the meeting it was at +20%. The benchmark yield, 10-year product, trades relatively steady at +1.97%, up from this weeks low print of +1.915% after the Fed announcement and from +2.09% at the end of last week. It’s in the long end that has led the decline, 30-year bonds trade at +3.13% (up +4bps) on bets that the Fed’s decision will spur inflation. Like most initial market moves, price movements seem to get over extended.

A stronger US number this morning should encourage further swapping out of the relative safety of US government debt into more corporate product, where yields and returns are more attractive. The Euro sovereign debt crisis and the threat of a US slowdown combined to give fixed-income a +9.8% return last year (the most in three years). So far this year, treasuries have handed investors a -0.2% loss through yesterday. The Fed’s longer term low policy rate should provide further short term support for equities.

At yesterday’s $29b 7-year auction, the final treasury issue of the week, brought a record low yield, however, it was higher than the market expected, indicating buyers’ reluctance to step in at current levels. The recent run in prices, no matter what is occurring at the Euro debt debate table, US product is a tad rich at current levels despite the Fed’s mandate. The mid-2014 language will help the belly of the curve longer term, however, at these levels, market participants seem to expect stronger data short term to trump current levels.

]]> http://forexbl.com/2012/01/27/us-yields-move-ahead-of-gdp/feed/ http://forexbl.com/2012/01/23/are-eur-bears-losing-the-fight/ http://forexbl.com/2012/01/23/are-eur-bears-losing-the-fight/#comments Mon, 23 Jan 2012 10:15:36 +0000 admin http://forexbl.com/2012/01/23/are-eur-bears-losing-the-fight/ 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.

Other Links:
China Feels the EURO Heat

Many analysts seemed to have factored in a record single currency low print somewhere in their trading strategy calculations. Is this attainable? Much depends on key issues such as the Greek PSI and the forthcoming Euro-area summit. The currency remains susceptible to possible near term policy risks in Europe and fiscal tightening.

For now, the market remain focused on the ongoing Greek private sector involvement negotiations. There are rumored reports that indicate an initial agreement has been reached on a voluntary restructuring, but uncertainty is likely to persist until it becomes clear how widely private sector participants will adopt the plan.

Below are some other highlights of the week:

EUROPE

• Merkel and Sarkozy started the week sounding the trumpets “We must solve Europe’s competitiveness problems”
• EU: Greece dispatches officials to the US for meetings with the IMF. The fear of a default and a subsequent euro-zone exit has overshadowed a mass credit downgrade of euro-zone countries. Athens requires a deal with the PSI within days to avoid going bankrupt when +EUR14.5b of bond redemptions fall due in late March. Talks with its creditor remain ongoing.
• EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
• FRF: French Treasury came to the market a day after being downgraded from AAA to AA+ by S&P’s. They auctioned +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
• EU: It was not a market surprise that the EFSF program was downgraded from AAA to AA+ late Monday.
• EUR: Stronger set of Chinese growth data managed to push the EUR off this years lows, a couple of days after sovereign credit downgrades. The single currency short term remains elevated!
• EU: The EFSF auctioned +€1.5b of 6-month bills, with a bid-to-cover ratio of 3.1 despite S&P’s downgrade to AA+. The Eurogroup has agreed to discuss the implications of trying to restore the AAA status. Spain also issued +€4.9b of 12- and 18-month bills with strong support.
• ECB: Euro-zone inflation was revised a tad lower to +2.7%, y/y, from the +2.8% initial estimate. Inflation had been boosted over the past three-months by VAT hikes and electricity prices. The ECB projects inflation to slow to +2% this year. Market does not expect an imminent rate cut. FI is pricing in one for March.
• GER: Despite remaining at depressed levels, the German ZEW expectations recovered sharply to -21.6 from -53.8 last month (sharpest increase in history).
• UK: UK inflation slowed to +4.2%, y/y, from 4.8% in November, in line with consensus. Last month, the core-inflation happened to fall to +3.0% from +3.2%. Not necessarily obstacles for expanding the QE program, but recent growth indicators suggest the risks are now for less rather than more QE next month.
• IMF: Market reports indicated that the IMF will seek to increase resources by $1Trillion, drawing largely on the BRIC economies, Japan and oil exporters. This news provided some risk appreciation and perhaps even more if augmented by a fully functioning ESM. Do not expect automatic or willing contributions!
• EU: Negotiations on Greek private sector involvement resumed midweek. It’s been reported that Greece is close to agreeing to pay +32c per EUR of government debt. Aiding the negotiations, Greek officials have signaled increased willingness to use collective action clauses if participation in PSI falls short of 100%.
• GBP: UK jobless claims surprised low at +1.2k in December vs. an expected +7k and continuing the positive trends for the unemployment rate. However, the ILO unemployment rate increased to +8.4% from +8.3%.
• EUR: The market risk rally remains intact, despite the poor data out of Australia. The CE3 block and Scandinavia currencies continued to outperform on the week.
• EUR: There was a successful longer dated issuance in both Spain and France. Spain issued +€6.6b in 5-10yr bonds while France placed +€7.9b worth of 2-4year paper and +€1.5b in inflation linked bonds. Despite the auctions yielding “strong” bid-to-cover ratios, the auctions failed to generate market momentum in FI.
• GBP: UK retail sales ex-fuel rose +0.6%, m/m in December. With sales remaining subdued, analysts expect falling inflation to help real consumer income and support future data releases. Cable is expected to remain under pressure.

]]> http://forexbl.com/2012/01/20/week-in-fx-europe-jan-15-20/feed/ http://forexbl.com/2012/01/16/eur-move-exaggerated/ http://forexbl.com/2012/01/16/eur-move-exaggerated/#comments Mon, 16 Jan 2012 10:27:36 +0000 admin http://forexbl.com/2012/01/16/eur-move-exaggerated/ The market needs an extended break to digest what was dumped on her late Friday and Martin Luther King Day in the US gives us that opportunity. The decision by S&P to downgrade the sovereign ratings of nine euro-zone nations continues to weight on risk sentiment across all asset classes. Thus far, the market believes that the one notch downgrade in France’s rating to AA+ should not snowball into widespread selling of French product. That theory has been tested this morning with the French Treasury coming to market with +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.

The biggest fallout from the rating agency’s actions will be the potential effect it could have on the EFSF. If the EFSF rating is downgraded, analysts estimate that the lending capacity would be reduced to +EUR150b. The German MoF is “in no doubt that the EFSF can fulfill tasks with the current volume.” The S&P’s chop has left Portugal with a rating of BB negative outlook, and has taken the country from a pool of investment grade assets to speculative grade, joining Greece and Cyprus. It seems logical to assume that if Greece cannot pull-off another PSI and move closer to default, then it will only be matter of time before Portugal is on ‘her shoulder.’ Policy makers unwilling to commit further funds are going to have a difficult time convincing investors that PSI for Greece will be the last.

Big picture, unless Draghi and company change its tune on QE or Merkel her views on Eurobonds then it will not be long before the market again is talking about another bailout for Portugal and an earlier focus on that country’s PSI situation.

FX moves seem to belie sovereign yields at the moment. Despite rates punching above their weight, there is a perception that the EUR has weakened too much following the rating announcements last week. The downgrades do not have much of a surprise element in it and the EUR has still managed to drop 1.5-big figures. In times past, and with FX anticipating a downgrade, the single currency typically weakened -0.3%. Is this currency move exaggerated? Perhaps it is the new norm to be seen across all asset classes?

Again, this morning selling EUR’s on rallies is preferred, giving the market a bearish consistency in all asset classes. With the US on holiday and in some corners a perception of an oversold market should lead to some further consolidation in the currency markets short term.

Other Links:
Worried about the Exit of Capital from China?

This mornings Italian bond auction has given the market more of an excuse to fade the single currency rallies. “Buy the rumor and sell the fact” played out very nicely. The market seems to have taken yesterdays stronger periphery auction results as an opportunity to own some ‘expensive’ EURs and even sell them at a profit and then some, proven by the price action over the last 24-hours. One gets the feeling that the market is again happily short at better levels. The solid prior sale of Italian bonds has only upped the ante and the results have only served as a trigger to short the EUR. Further tests of the 1.27 handle are eyed with fresh offers reappearing at the old option strikes of 1.285. The longer term support remains close to the option barriers of 1.265.

Italy managed to sell a total of +EUR4.75b 2014/2018 BTP (the top end of their range). The yields at the auction came in lower than the secondary market levels, some traders were disappointed with the bid-to-cover ratio; the FI market seems happy selling Italy and buying German Bunds as the spread looks attractive.

Even surprisingly strong EUR data is ignored by market players. The Euro-zone this morning posted an unexpected trade surplus surprise. The market had been forecasting a deficit of-EUR1b, however, the region registered a surplus of +EUR1b. A surge in exports helped the Euro-zone post this major surplus. Can the region avoid a severe economic downturn? The Euro tends to post trade deficits in the winter months due to the high fuel and energy inputs. However, the seasonally adjusted figures show that the inputs were the same month-over-month while exports surged +3.9%!

Now we have to wait and see if North America wants to cash in some EUR profit this morning, no matter what, offers are again appearing as the market seems to have more conviction about medium term direction. Before this weeks auctions, the bulk of investors have been happily waiting on the side lines.

Other Links:
Will the US embrace the EURs new found confidence?

On the one hand, gold has traditionally been seen as a hedge against inflation, but on the other hand, gold can also trade like an alternative currency that cannot be debased by Central banks.  The precious metal can flip-flop back and forth between these dual properties but make no mistake about it, gold is now moving back higher.

This move though is likely as a result of its alternative currency trait, as the Euro has been moving lower because of the risk in the market.  However, gold has also been moving higher as the Euro has been moving higher, so which is it?

This is confounding the hard-core fundamentalists, so let’s take a more simplistic approach.  Much of gold’s moves can be attributed to anti-US dollar sentiment which also used to be the way that he Euro traded.  However, there is an overwhelming feeling that both the Euro AND the Dollar should be moving lower in tandem.  The former should be lower because of the debt crisis, and the latter because of US Fed money printing.  With increased money supply flooding the market the natural expectation is that there should be inflation, but that does not appear to be the case today.

So either way you slice it, gold will continue to get a bid and should move higher past the R2 daily pivot resistance we are seeing today at $1657, with the hope that it will continue higher to $1700!

On the one hand, gold has traditionally been seen as a hedge against inflation, but on the other hand, gold can also trade like an alternative currency that cannot be debased by Central banks.  The precious metal can flip-flop back and forth between these dual properties but make no mistake about it, gold is now moving back higher.

This move though is likely as a result of its alternative currency trait, as the Euro has been moving lower because of the risk in the market.  However, gold has also been moving higher as the Euro has been moving higher, so which is it?

This is confounding the hard-core fundamentalists, so let’s take a more simplistic approach.  Much of gold’s moves can be attributed to anti-US dollar sentiment which also used to be the way that he Euro traded.  However, there is an overwhelming feeling that both the Euro AND the Dollar should be moving lower in tandem.  The former should be lower because of the debt crisis, and the latter because of US Fed money printing.  With increased money supply flooding the market the natural expectation is that there should be inflation, but that does not appear to be the case today.

So either way you slice it, gold will continue to get a bid and should move higher past the R2 daily pivot resistance we are seeing today at $1657, with the hope that it will continue higher to $1700!