Credit spreads are at the widest levels since the inception of the Euro as skepticism over Greek austerity is causing borrowing costs to skyrocket to the point where they may become unworkable. This has greatly heightened fears of Greek default, which in turn has put pressure on the Euro this morning.
In addition, the ECB predictably left interest rates unchanged at 1% in the wake of yesterday’s stagnating GDP report. ECB Prez Trichet is going to speak later and whether or not he dodges the Greek issue will be interesting to see.
In the UK, the BOE left both its asset purchase plan and interest rate unchanged going into the May elections as economic recovery is still on shaky ground and fears of the “double dip” persist.
All of this adds up to risk-aversion this morning and the different currency pairs are behaving as expected.
In the forex market:
Aussie (AUD): Australia added 19.6 K jobs last month and its unemployment rate held steady at 5.3%, almost half that of the US and Europe, giving support to the RBA decision to raise interest rates earlier this week. The economy appears to be chugging along in Australia as exports have been rising due to Chinese demand and the fact that Australia was largely able to sidestep the economic problems which are plaguing other world markets. Nevertheless, the Aussie is lower vs. Yen and USD on risk aversion.
Loonie (CAD): The Loonie is lower this morning as oil prices are lower as risk aversion is the theme of the morning. The Loonie is above parity with USD but still hovering. Canada will report its unemployment change tomorrow which if better than expected, could push the Loonie back to parity regardless of risk themes.
Kiwi (NZD): The Kiwi is just kicking about, trading lower on risk themes and commodity prices. No news on the Kiwi.
Euro (EUR): I feel like this story had been beaten to death already and without any positive news regarding backstops for Greece, the Euro will trade lower. A lower Euro is obviously good for exports (Germany), but default would be a catastrophe for the Euro which may bring structural issues to the forefront.
Pound (GBP): UK manufacturing surged to its highest level in almost 2 years, besting estimates two-fold. This is a good sign for the UK economy, which undoubtedly has benefited from a lower Pound. Despite this good news, the pound is lower as the BOE left the interest rate and QE program unchanged, and additional polls are showing that the Labor Party is gaining on the Conservative Party, which could lead to neither party holding a majority. It’s interesting to see that it is BAD news in the UK to have political gridlock, while it is actually favored here in the US. Go figure.
Dollar (USD): “Initial jobless claims increase unexpectedly” (AP). True headline. I mean really, is this really unexpected? We have a situation here in the US where Congress is spending like drunken sailors, our President is constantly speaking about everything under the sun EXCEPT jobs, and landmines keep trickling out of this new healthcare bill which shows that it will cost employers more and not less to implement. And people are “surprised” that jobless claims are higher? The Dollar is higher on risk-aversion. Nuff said!
Yen (JPY): Japanese machine orders fell vs. an expectation that there would be a gain as a result of increased overseas demand for Japanese exports. The Japanese are typically more cautious in their spending habits, so it may not be surprising that they are waiting to see more recovery in other global economies. So Japanese stocks are down and the Yen is higher as demand for Yen is higher due to risk-aversion and the un-wind of carry trades.
One of the great advantages to the forex market is that certain economic themes can play out over the course of a few days, thereby creating excellent short-term trends which can be played until the theme changes. This typically occurs by the reporting of some contrary news which causes the theme to reverse.
So at times I may seem like a broken record when news like the problems in Greece or UK elections are still in effect; but what that effectively does is drive that currency in the same direction until a situation is changed or some equal and opposite news outweighs the original driver of that currency.
This is the main reason why the forex market tends to trend better than all other markets, as governments cannot typically “turn on a dime” to reverse an undesirable trend.
So what are you waiting for?
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