Forex Blog

January 16, 2012

Debt Downgrade Jeopardizes Eurozone Recovery

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 12:23 pm

Friday’s sovereign credit rating downgrade by Standard & Poor’s brings a new sense of urgency to the European debt crisis. The move also shines a spotlight on the region’s abysmal adherence to the Eurozone’s fiscal management rules as leaders prepare for yet another European summit on the debt crisis slated for January 30th.

Greek officials will actually get a head start on the summit as they are schedule to meet on January 18th following a series of unsuccessful discussions last week to reach an agreement with the country’s largest creditors. Last fall it appeared that a deal had been arranged that would see Greece’s largest creditors receive 50 percent of the face value on Greek debt. This arrangement was expected to reduce Greece’s deficit to 120 percent of GDP by the end of the next decade, but the deal now appears to be in question. Talks between the banks and the Greek government are scheduled to resume on January 18th.

Failure to come to terms on the debt discount places the release of the next tranche of emergency funding to Greece at risk. Greece has more than 14 billion euros ($17.8 billion) in debt due to mature over the next two months and if unable to meet the obligation, Greece would have no option but to enter into a full and uncontrolled default. Few expect it to come to this, however, as a calamitous default of this nature would spread debt contagion throughout much of the Eurozone at a rate beyond the region’s capacity to maintain.

Europe’s Largest Economies Suffer Credit Downgrade

In actual fact, few were surprised when Standard & Poor’s slashed credit ratings for a total of nine Eurozone countries late last Friday. Of the region’s top five economies, France and Austria both lost their coveted triple-A ratings leaving only Germany at the top tier. Italy and Spain were further downgraded to below investment grade status.

Citing deteriorating economic prospects and the anemic attempts so far to meet austerity targets and reduce deficits, S&P also placed the countries on a “negative” credit outlook leaving the door open to additional downgrades.

Following the official notice of the demotion, European officials rushed to minimize the impact of the historic downgrade. German Chancellor Angela Merkel said she believed the credit action would prove to be positive as it would urge member states to agree to a “financial compact” to help salvage the union and the euro.

Markets were less optimistic and the first full day of trading following the downgrade was mixed. European stocks were up slightly near the end of the day, while markets were off by the mid-way point in the North American trading day. Still, the real test is expected to come tomorrow when Spain will attempt to raise about 6 billion euros ($7.6 billion) in short and mid-term bonds, with another 4 billion euros ($7.6 billion) in long bonds.

“The rating downgrade is definitely going to create headwind for the Spanish bond auction,” Christian Lenk, analyst at DZ Bank, told the Financial Times Deutschland. He said he didn’t believe that the country could “repeat last Thursday’s auction result,” in which it was able to sell twice as many bonds as envisaged at lower interest rates than before.

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January 6, 2012

Week in FX Europe Jan 1-6

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 9:48 am

It’s been a big week for the EUR with negative sentiment gathering momentum on last years currency play. The market has managed to penetrate the EUR’s 16-month low allowing technical analysts, who are ‘biting at the bit’, to produce varying degrees of new downside objectives. Investors are seeing a modest bid for European growth proxies, with the Nordic and CE3 pairs gaining despite weak German orders data. However, with growth questionable for ‘that’ region and the HUF particularly vulnerable due to tensions with IMF and ECB over the new central bank law, these currencies are expected to ‘stumble’ somewhat. It seems that the EUR is becoming more attractive as a funding currency, while the dollar is being viewed as an investment currency. Euro-yields are the FX beacon and next week’s Italian and Spanish funding requirements will provide the lead for currency direction.

Below are some other highlights of the week:


EUROPE

  • EU: The Euro-zone manufacturing PMI was left unrevised at 46.9, up from 46.4 in November. Despite remaining in contraction territory, both German and French manufacturing PMI’s rose in December. Italian and Spanish data appears to have stabilized at very weak levels while the Greek PMI improved slightly.
  • NOK: The PMI’s were weak in Norway but surprised to the upside in Switzerland. In Sweden the market witnessed a print of 48.9 vs. 47.6 in November.
  • UK: The manufacturing PMI came in stronger than expected at 49.6, up from 47.7 in November. Despite remaining in contraction, there are tentative signs of the economy regaining some momentum into the new-year. Some of the sub-categories appear strong. New-orders were up to 49.2 from 46.3 in November and employment rising to 49.5 from 46.4. Interestingly, the new export orders component was very strong, at 53.5. A pleasant surprise was the upward pressure in output prices continued to recede, at 50.8, down from highs of 65.2 in February.
  • CHF: The Swiss manufacturing PMI index jumped to 50.7, up from 44.8 in November. Digging deeper, output, backlog of orders and stocks of purchases all gained significantly and returned to levels in ‘expansion’. The employment component was up by 2.4 points to +48.2 points, however, it remains low.
  • GER: unemployment fell by -22k in December and the unemployment rate slipped to +6.8% from +6.9%.
  • NOK: The country’s manufacturing PMI fell to a new cycle low of 46.6 in December from 48.5 November.
  • EU: Bond price action in Europe remains a likely source of concern, with Italian and Spanish 10-year yields continuing to creep higher.
  • EU: Analysts note that the strong round of global PMI’s continue to support the notion that, “while global growth looks below average in Q4 2011, the probability of a recession outside Europe remains relatively small and diminishing.” The disclaimer is the rebuilding of Euro stress.
  • EUR: Euro-zone services PMI was revised higher to 48.8, up from 47.5 in November and able to drag the composite PMI higher to 48.3. However, the prints remain in contraction territory.
  • EUR: Spain and Italy fared differently. The services PMI improved in Spain from 36.8 to 42.1, while Italian services PMI fell to 44.5 from 45.8, with particularly negative developments in the more forward looking new business component. French services PMI was revised a touch higher to 50.3 and German a little lower to 52.4.
  • EU: Euro-zone inflation moderated to +2.8% in December from +3.0% previously, in line with consensus. This bodes well to allow the ECB to continue easing.
  • UK: Foreign investors bought £16.3b of gilts in November, just shy of 2008 record high. Increased foreign demand could be due to the systemic risk in the Euro area and lack of AAA reserve alternatives.
  • EU: Euro-yields are becoming an FX beacon. France successfully auctioned close to EUR 8b in bonds but yields are rising in the periphery, with Italian 10-year yields back above 7%. Spain and Italy are up next week and the market is nervous. Renewed pressure on sovereign markets is undermining the hope that the ECB’s 3-year repo operations would not be sufficient to stabilize markets.
  • UK: Services PMI surprised much stronger than expected, increasing to 54.0 in December from 52.1 in November. Add this to better manufacturing and construction PMI prints and bodes well for better growth momentum going into this New Year. However, manufacturing in contraction territory may justify an extension of QE in February, in line with expectations.
  • EUR: German factory orders surprised much weaker than expected, dropping -4.8%, m/m vs. the consensus for -1.8%. The loss was driven by foreign orders, down -7.8%, m/m.
  • EUR: EC confidence surveys were broadly in line with consensus last month. The data still point to a European economy flirting with recession and vulnerable to further hits to confidence.
  • CHF: Swiss December CPI fell -0.7%, y/y, and down from -0.5% in November. Foreign goods inflation contributed strongly to this result, with foreign goods prices down -0.7%, m/m and -3.3%, y/y, suggesting lagged exchange rate effects remains. Market expects the SNB to keep the 1.20 floor unchanged well into 2012.
  • SNB: Hilderbrand is still under pressure from his wife’s currency trading gains just before the floor was introduced-any possibility of resignation could see a CHF sell off.
  • NOK: Norway’s manufacturing production surprised to the upside, proving somewhat more resilient than expected. Manufacturing production rose +0.2%, vs. the consensus for a -0.1% drop.
  • CE3: IP surprised stronger in the CE3 economies. Hungarian industrial output increased +3.5%, y/y, in November, above expectations for +1.5%. Czech Republic; IP aggressively rallied +5.4%, y/y. With growth questionable for the region and the HUF particularly vulnerable due to tensions with IMF and ECB over the new central bank law currencies are expected to underperform.

Cross Border Dollars Temporarily Diverge

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 9:47 am

The ‘big’ dollar remains the go to currency. The market seems to be shifting away from wanting to own it solely as a risk aversion strategy, to one where the buck is being used as an investment currency while the EUR trades as the funding vehicle. Whatever the reason the currency has garnered further support after a stronger than anticipated payroll print. The dollars neighbor and largest trading partner, Canada, has lost some of its shine after its own job report saw the unemployment rate tick to an eight-month high (+7.5%). Friday was not the day to want to own this ‘growth proxy’ currency outright. The crosses have been working in its favor to at least stem its cross-border slide. Next weeks refunding requirements by Italy and Spain again will dictate all dollars direction.

Below are some other highlights of the week:


Americas

  • US: ISM index rose to 53.9 in December (6 month high) from 52.7 the month prior (historical average about 51). Orders, production and employment were all up, a good sign that the US economy accelerated last quarter. Analysts note that “the data isn’t signaling a dramatic change in the hard data, which has consistently outperformed the indicators for some time”.
  • USD: The FOMC minutes did not have a major impact on markets. The key new news was that the Fed will now publish Fed funds forecasts on a quarterly basis when it provides other economic projections (next round due after the January 24-25 meeting). Officials would provide forecasts for the first hike. However, with rates expected to remain near zero until the middle of 2013 is not much of a market concern.
  • USD: Construction spending rose +1.2% in November after a -0.2% decline the month prior.
  • USD: US factory orders grew for the first time in 3-months increasing by +1.8% in November from previous months to +$459.18b. Non-defense aircraft orders were up +73.9%; ex-transport orders up +0.3%; orders for non-defense capital goods ex-aircraft down -1.2%.
  • USD: ADP saw an outsized jump in the employment report of +325k gain, far exceeding the median estimates of +178k. Historically, the print has technical issues and in the past has overshot the government by a wide margin.
  • USD: Last week was the eight time in nine weeks that initial claims came in below the psychological +400k print. Claims fell by -15k to a seasonally adjusted +372k (a strong positive sign for an economic turnaround).
  • CAD: Canadian producer prices (+0.2%) and the cost of raw materials (+3.8%) advanced in November ahead of market expectations, largely the result of higher fuel bills. A weak loonie also played a role in pushing industrial prices upwards.
  • CAD: Purchasing activity expanded from November. The IVEY PMI was at 63.5 on a seasonally adjusted basis in December.
  • USD: Crude supplies rose +2.21m barrels last week to +329.7m
  • CAD: Canadian employment showed a stronger headline print (+17.5k) than consensus (+15k) in December. The unemployment rate ticked to an eight-month high of +7.5% (full-time -25.5k, part-time +43.1k). Average hourly wages +2.2%, y/y, but hours worked took a hit which is not good for GDP.
  • USD: US payrolls beat all expectations, printing +200k job gains versus expectations of +155k. Even better, unemployment rate fell -0.2% to +8.5% and stronger than Novembers retreat because +176k became employed while only -50k stopped looking. In the revisions; November lost -20k, while October gained +12k, accumulating in a net loss of -8k for the two months. “Some of the strength in this report should be discounted because of an seasonal quirk in the courier category of payrolls (Fed-ex, UPS, etc). Jobs in this sector jumped 42,000 in December, repeating a pattern seen in 2009 and 2010 (see attached figure). We should see a payback in next month’s report.

Forex Market Outlook 1/6/12

Filed under: Forex News — Tags: , , , , , , , , — admin @ 6:16 am

Today is jobs Friday with the all-important Non-Farm Payrolls report due out later this morning.  The official expectation is that we will see an addition of 155K jobs, though based on recent data releases, I’m hearing that the “whisper number” may be a lot higher.

For those of you unfamiliar with the “whisper number”, it is essentially a figure that market insiders are expecting which is usually higher than the official expectations.  This usually occurs because of new information that comes out between when the estimates are released and the actual release of the figure.  Yesterday’s ADP report came in much better than expected and other economic data reports here in the US have been positive, creating a hope that this figure will blow out expectations much like the ADP number.

What I am hearing is that the whisper number for this report is 185K, with some expecting a print above 200K.  Why is this important?  Because the markets are a discounting mechanism so a lot of these expectations are already baked into the cake.  So sometimes a better than expected number might not be good enough if it doesn’t eclipse the whisper number.  For a example, a print of 165K would be 10K better than the expectation, but 20K below the whisper so the initial reaction could be very positive, but then we could see a quick reversal and the markets sell-off.  This is often referred to as a “bull trap” and can create heavy volatility, which is often what we see after these releases anyway.

So how does one trade this figure?  My advice is usually to wait until after the number is released and then wait for either a pullback from the initial move to get in with the new trend, or wait for a reversal and take the opposite position once the initial frenzy is done.  Easier said then done, I know, but getting into positions ahead of the figure is just gambling.  The example I used above is just one possible scenario and by no means is a recommendation for action if those should be the number that are released.

So what else has been happening in the markets this morning?   Well the news continues to worsen in the Euro zone though thankfully it is not related to the debt crisis directly.  Unfortunately though, the news is that the fundamental data is getting worse pointing to a recession in Europe.  Economic sentiment figures are at a two-year low, and German factory orders came in worse than expected, showing a decline of 4.3% vs. an expected decline of 1.2%.  In addition, Euro zone retail sales figures also came in lower than expected, posting a decline of 2.5% vs. an expected decline of .9%.  The unemployment rate came in as expected at 10.3%.  Not good at all.

This comes ahead of next week’s meeting between Merkel and Sarkozy on Jan 9th to discuss the new fiscal cooperation, and before major bond auctions in Spain and Italy at the end of next week.  So it could get ugly.

With all of this negativity, one would expect the markets to be in major risk-aversion mode, but to start the US session this is not the case.  Both stocks and commodities are higher, including European stocks, and the Euro has bounced back from earlier 16-month lows, though it is fast approaching that level again.

The other news is that Swiss CPI data came in lower than expected showing continued deflation, though it hasn’t budged the franc much.  The SNB has maintained its target range fairly well and is still at levels that may be too low to support price stability.

In Canada, the unemployment rate ticked higher to 7.5% vs. the expected 7.4%.  This has caused the Loonie to tank vs. USD despite the fact that higher oil prices have been driving Loonie strength.  This could reverse yet again, if a better than expected NFP figure is reported.

So the official NFP number is for a gain of 155K jobs, and the unemployment rate is expected to tick higher to 8.7%, so don’t be concerned if that occurs.  Keep an eye out for that whisper number though, as sometimes what is seemingly good can be disappointing!

January 5, 2012

FX requires EUR Fixed Income to trade?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:20 am

Fundamentals could not get the ball rolling, that was left to rumors of a ‘larger’ German bank requiring capital. Dollars and Yen continue to grind stronger allowing the EUR to print a 15-month low on funding stress issues in Euro-land. What Euro financial institution does not require capital? Not helping investors mood were comments from the Greek Prime Minister Papademos. He stated that slashing incomes are the only way for his country to remain in the EU and receive more financing from international creditors to avert an economic collapse. As they say, it’s difficult to get ‘blood from a stone’.

Over the next two weeks FX traders will hopefully have become experts in the FI income sector. It is there that the front line action will occur. There are a few important issues coming to the market that will be testing investors appetite for risk. The demand for varying issues will be highlight the “faith” being put into the various economies. Yesterday’s German Bund auction, a solid product in market theory, received a somewhat lackluster response to the issue. This certainly is not an encouraging response for Italian and Spanish debt auctions next week. Both of these economies are in the investors ‘crosshairs’. We can expect the back-room staff, the ECB and company, to create a positive atmosphere around troubling issues. This morning they were in buying Spanish product. Remember, all of this trading in various markets and market prices is about perception. Dealers are required to create it and traders deal on it! Expect the ECB to be buying government bonds as part of its SMP, where it intervenes in the secondary bond market to ensure depth and liquidity.

This morning France was on the agenda. With Sarkozy publicly concerned about his country retaining its AAA rating status, the issue of +8b euros of debt today was the country’s first test this year of investor appetite for its bonds. The result, France sold +4.02b euros of benchmark 10-year bonds at an average yield of +3.29% from +3.18%. The 10-year sector, usually the benchmark indicator, debt bid-to-cover ratio fell to 1.64 from 3.05. Despite being somewhat well received for other remaining maturities, Frances cost of borrowing has increased, providing another reason to want to own less of the EUR. Last tally, with Italy and Spain amongst countries in the coming weeks to sell debt that may reach EUR+262b’s worth in the first quarter, rising funding costs will not make saving the 13-year old currency any easier.

The market will now focus on North American employment data, with NFP out tomorrow. This morning’s ADP report will provide a preview of tomorrows print (the correlation between the two prints has been tentative at best of late). It seems that market consensus is looking at an +178k ADP result, which approximates a +170k private payrolls print. The non-manufacturing ISM is also released and is expected to rise off November’s two-year low of 52, with seasonal effects in the employment component contributing. Jobless claims will also be a focus, though the holiday period complicates interpretation of this data into year-end. Will the stronger data provide support for US growth proxy currencies like the CAD and AUD? In theory they should, however, strong risk conviction has been fleeting at best and a surer bet would have participants wait until tomorrows job release for direction.

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December 19, 2011

Forex Market Outlook 12/19/11

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 7:26 am

The big news of the weekend is the death of N. Korea’s crazy leader Kim Jong Il, which has provided a minor bit of uncertainty in the Pac Rim as it is expected that his son will succeed him.  The goes to show that uncertainty is sometimes worse from a market perspective than the removal of a bad situation.  I would though have thought that markets would have rejoiced and rallied, but uncertainty rules.

However the markets have bounced back from early selling in Asia and look to open higher here in the US, with both stocks and commodities trading higher.  There is still a lot of risk emanating from the Euro zone, and the potential for credit downgrades is looming.

In Spain, bad loans were up as the Spanish banking system attempts to withstand the fallout from the housing bust there and maintain stability despite unemployment that is over 20%, the highest in Europe.  This comes after word form ECB chief Draghi maintained that the ECB would not step up their bond purchases, electing to adhere to the Central bank’s mandate rather than favoring practicality.

Later today, Euro leaders will conduct a conference call where they attempt to hammer out the details of the fiscal pact they agreed to at their last meeting.  This unlikely to be the final word on the matter and Euro leaders have contributed to the economic demist they are seeing by dragging their feet and not responding to the crisis more swiftly.

Meanwhile they have been swift in asking others for money, particularly the IMF.  EU leaders are calling for an additional $261 billion from the IMF and are asking the UK for $50 billion.  Good luck with that.  The Euro has been vacillating around the 1.30 level vs. USD, which is surprisingly strong given the state of affairs in Europe.

This is a holiday-shortened week so volume may decline as we approach the weekend.  News this week from the EU includes German PPI and economic sentiment figures tomorrow, though there is not much else from a data perspective.  This is not to say that there won’t be any news, but I will more likely be of an unexpected nature.

There is more news due out from the UK, including the release of the rate policy meeting minutes on Wednesday and GDP figures on Thursday.  This could be supportive of the Pound if the BOE decides to take a wait and see approach or if GDP comes in better than expected.  The data in the UK has been relatively strong in my opinion, though the markets are a discounting mechanism so surprises could happen to the upside.

In Japan, the rate policy meeting on Thursday is expected to produce no change as the Yen has virtually stopped trading vs. USD.  There has not been a lot of volatility in this pair, which is just fine by the BOJ.  But, there could be some Yen movement if problems emerge from N. Korea.

From the commodity currency bloc, the release of the RBA meeting minutes in Australia tomorrow, followed by Canadian CPI data on Wednesday and GDP figures on Friday, and rounded out by GDP figures in New Zealand could have an effect on the risk trade.  Gold is sitting at $1600 with oil just above $94.

Lastly here in the US, the news releases are heavier toward the end of the week highlighted by the release of GDP figures on Thursday and some ancillary releases packed in.  Markets are hoping to escape for the holidays with little fanfare and many are looking forward to putting this year behind us.

While the data here in the US has largely been positive, it is hard to buck the feelings of malaise that overhang the markets and the economy in general. There is absolutely no confidence that things are going to improve, and people are just waiting for the next shoe to drop.  This is no way to run an economy as fear trumps sanity and then things don’t improve.  Combine this with EU leaders essentially holding the world hostage through their non-actions, and we find the global economy floundering.

Will this continue into next year?  Unfortunately, I think so.

December 13, 2011

Forex Market Outlook 12/13/11

Filed under: Forex News — Tags: , , , , , , , , — admin @ 6:59 am

The markets are in a much better mood this morning after yesterday’s sell-off in risk assets.  While stocks held up a little bit better than expected, US dollar strength pushed other currencies lower and gold fell to 7-week lows.   Stocks and commodities are higher this morning, as European yields appear to be falling which makes borrowing costs lower for the beleaguered region.

While Moody’s has put European credit on negative review, at this point none of the ratings agencies has made an official downgrade.  Spain was able to issue notes that were close to a full percentage point lower than just one month ago.  The EFSF was also able to issue short-term paper and it’s offering was 3x over-subscribed showing great demand.

This appears on the surface to be positive so it will be important to see that fiscal agreements are adhered to going forward to keep the bond vigilantes away.  If the debt-strapped countries can continue to service their debts and get some relief on the cost to do so, then the Euro zone has a much better chance of survival.  Of course the trick will be how to simultaneously get governments to cut spending AND avoid an economic recession.  Lower interest rates thanks to Draghi are a step in the right direction, though he needs to be sensitive to possible inflation.

Today’s FOMC meeting will be interesting as it is likely that the Fed will attempt to steer the markets toward optimism by stating a position that is helpful to the Euro zone.  What exactly that is remains questionable at this point but they are likely to remain accommodative for an extended period.  At what point inflation expectations start to rise is anyone’s guess but this can also be detrimental to economic health despite the Fed’s view to the contrary.

US advanced retail sales are likely to have a big impact this morning as the US economy has been slowly gaining traction in “stealth mode” and the recent economic data has come in better than expected.  The early reports from the holiday shopping season have been better than expected, though it is questionable whether or not the consumer can maintain such levels of consumption going forward.

Overnight, the economic data reported was largely positive as well, with both the ZEW German and Euro zone economic sentiment figures coming in better than expected.  Confidence should improve in the Euro zone if a lower valued Euro can help contribute to economic growth.

In the UK, home prices fell less than expected which shows that the housing market may be stabilizing and inflation in the UK did indeed fall from 5% to 4.8%, as expected.  The retail price index also came in as expected.  The BOE has been begging or inflation to come down despite their easy money policies and perhaps that stubborn inflation is starting to fall in line with their expectations.

**This just in: US advance retail sales figures came in worse than expected, showing a gain of .2% vs. the expectation of .6%.  Bear in mind that this figure is for November, so perhaps people have been saving all of their shopping for the December holiday shopping season.

Futures are giving back some early gains but not to the point where it would reverse sentiment though these sales figures are clearly a disappointment.  Today’s FOMC meeting could be critical for investor confidence, though they are not going to save the world today.

Overall risk in the market has not abated, though every day we can move in a positive direction will help confidence going forward.   There will likely be a point where market correlations will begin to break down as some of the risk themes become more specific and we move away from this “risk on, risk off” environment.

However until that happens, keep it to the short-term.  My feeling is next year will provide an opportunity to pick individual winners and losers.

EUR to be bullied lower?

Filed under: OANDA News — Tags: , , , , , , , , , — admin @ 4:23 am

Ongoing fears about European debt continue to dominate market sentiment. Rating agencies are already doing their bit this week, by adding pressure in warning on the future of the Euro-zone. The agencies rarely bring us good news in this trading environment, but seem happy to deliver bearish news in some of the most “delicate” of times (just ahead of the EU summit). Market concerns over possible rating downgrades and the absence of a ‘lender of last resort’ is expected to lean heavily on risk appetite well into the New Year. Because we are in December, it’s difficult for many participants to strap on massive risk positions in a low-liquidity and volatile environment.

The disappointment about last week’s EU deal is evident in financial markets. Global sentiment has soured even more from rating agency comments that EU leaders have not done enough to contain this debt crisis. Last night, Japan publicly acknowledged that it would only consider support for Europe if leaders can come up with a “concrete scheme.” Despite Japan having its own problems, a G7 member providing a publicly damning verdict on events in Brussels suggests that Euro leaders are no closer to the solution of how their sovereigns will be capable of rolling over billions worth of maturing Euro debt early next-year. Earlier this morning, despite higher yields, Spain successfully auctioned its Bill requirement. Over the next week there is a good amount of global product coming to market that requires absorption.

Overnight, rating agencies have not let up. Moody’s placed eight Spanish banks on review for possible downgrade, citing domestic economic weakness and an ailing commercial real estate market. These reasons are only ever going to become more dominant with the threat of the Euro-zone dipping into recession come the New Year.

The market expects a “steady” Fed and robust US retail sales print later this morning. The FOMC meets today, and with US data having improved and European stress “reasonably” contained so far, the market sees little need for policy change this week. The likelihood of QE3 occurring is easing in recent weeks, as manufacturing, labor and confidence reports have mostly surprised to the upside. The possibility that the US economy is on an even keel can only be positive for the greenback.

German ZEW Economic Sentiment improved (-53.8) this morning despite the market expecting another pull back on thinly veiled optimism that Euro leaders will find a resolution to the regions’ debt crisis. It was capable of rising for the first this month in nine consecutive readings. The ZEW believes that the decline for economic sentiment has probably bottomed out. Obviously, they are unaware of how threatening and damaging rating agencies are; they are the “piranhas” of the credit world. The current conditions’ index fell to 26.8 from November’s unrevised 34.2. If nothing else, the surprising data will provide the market a better opportunity to own the dollar. However, evidence of lack of market conviction will have to wait for the retail sales print.

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Euro Summit Failure Underscores Need for Sovereign Default

December 12, 2011

Euro Summit Failure Underscores Need for Sovereign Default

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 3:26 pm

The euro fell to $1.310 by 2:30 pm in New York on Monday and continues to be assailed on two fronts. Investors clearly remain unmoved by the outcome of the weekend summit meeting and this has money leaving the euro in favor of safer destinations. In addition, the European Central Bank’s back-to-back interest rate cuts have also eroded support for the euro.

Summit Meeting Underwhelms Eurozone Watchers

Once again, a lot of talk came out of Brussels as the 17-members states scheduled yet another meeting to discuss the sovereign debt crisis. And once again, the rhetoric fell tragically short of establishing a firm course of action.

In the end, the Eurozone brain trust failed to provide a compelling argument to convince investors that a credible plan was in the works to prevent the crisis from spreading to the larger economies including Spain and Italy. One has to wonder how many more opportunities can be squandered before the Eurozone finds itself past the point of no return.

The main outcome of the weekend meeting was the establishment of another fund, this time to be administered by the International Monetary Fund. Eurozone central banks will provide 200 billion euros to the IMF which is also expected to make available another 300 billion euros.

This new fund will be in addition to the existing European Financial Stability Fund. The EFSF currently contains about 500 billion euros but much of it is already committed to existing bailout plans. This leaves the EFSF woefully underfunded to save the larger economies now teetering towards insolvency.

The fact that eurozone officials continue to print money in anticipation of another round of bailouts makes it clear that the problem is still being perceived as a liquidity issue. The reality, however, it that the lack of liquidity
is the result of a debt problem and a corresponding lack of confidence. Investors are unwilling to buy Greek debt at a rate Greece can afford; and until confidence is restored, Greece and a handful of other countries following Greece’s path will continue to rely on bailouts to cover their deficits.

The only way to break this dependency is to invoke a reset. These countries must be forced into a controlled default that involves a writing-down of sovereign debt. The cash now being set aside would be better served to minimize the impact a write-down would have on debt holders including the banks forced to accept a reduced payout.

To simply hand billions of euros over to these countries may deal with the symptoms, but does nothing to address the ailment.

December 9, 2011

Week in FX: Europe December 4-9

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 10:43 am

This week was supposed to be an historic week for the EUR. It’s actually ending on a whimper. The ECB cut rates and delivered more significant measures to improve bank funding conditions. However, the ECB has again stopped short of signaling a level of support for peripheral bond markets. Even the Euro summit progress today towards fiscal union will not trigger an accelerated pace of bond purchases, end result, this will leave the EUR vulnerable. Market participants will now be trying to anticipate any ECB market activity early next week. The market needs to be convinced that the EU actions will be great enough to avoid a credit downgrade from the ratings agencies, which could come as early as next week.

Below are some other highlights of the week:


EUROPE

  • EUR: The start of the week saw Italian 10-year yields down to +6.16%, more than +100bp off the November highs. However, the real challenge for the sovereigns comes in Q1, when issuance picks up again, and markets appear to be pricing in a good deal of progress towards fiscal union at this week’s EU summit.
  • ITL: The Italy’s government approved new fiscal measures totaling +EUR30b.The package is divided into +EUR20b of budget tightening and an additional +EUR10b that will be pumped back into the economy in the form of measures to help companies and boost growth. The spending cuts come from pension reforms and revenue raisers mostly related to taxation of wealth/real estate.
  • EUR: EZ November services PMI was revised lower to 47.5 from of 47.8 and remains in contraction territory. Services PMI was particularly weak in Spain, falling to 36.8 from 41.8. German PMI was revised substantially lower to 50.3 from 51.4. In contrast, Italian services rose slightly while French services were revised higher, but both remained below 50.
  • UK: Service PMI surprised strong rising to 52.1 from 51.3 in October. Analysts note that the details were less encouraging with new orders falling to 52.3 from 53.2 and employment down to 48.2 from 49.8. This suggests that the general weakness of the UK economy continues to justify extension of the QE program in February.
  • EUR: S&P put 15-Euro zone countries, including Germany and France, on negative credit watch prompting many comments that the rating agency should “stay out of politics” ahead of this weekend’s EU meetings. All six AAA countries were placed at risk, and S&P noted that they could see a two notch downgrade. This creates a 50% probability of ratings downgrades in the next 90-days.
  • EU: ECB’s 1-week deposit auction succeeded in fully sterilizing the +EUR207b SMP.
  • EUR: German factory orders surprised strong, rising +5.2%, m/m, in October, more than reversing the -4.6% drop the previous month. Digging deeper, foreign orders and capital goods orders were particularly strong. However, analysts still expect “a sharp slowdown in Q4 growth in Germany”.
  • CHF: Swiss CPI declined more than expected (-0.2%, m/m), pushing headline inflation to -0.5%, y/y, in November (lowest level in two years). Core-inflation also fell to a record low of -1.0%. Analysts note that deflation risk has emerged earlier and deeper in Switzerland than the SNB’s projection in their Monetary Policy Statement. Much of the deflationary pressure comes from foreign goods (-2.7%, y/y), while domestic inflation remains at +0.3%. However, with the labor market remaining solid, wage growth positive and credit expanding should help fight deflationary pressures.
  • S&P: Put the long term credit rating of EFSF on credit watch negative.
  • EUR: Event risk fears and rumor mongering had many investors wading to the sidelines ahead of the ECB announcement and EU summit.
  • EU: European banks borrow USD50b from Fed via ECB. The funding was conducted at the new lower OIS +50bp rate.
  • EU Rumor: That discussions were ongoing on an enhanced ESM which might even be able to borrow from the ECB.
  • German Officials: Warned that many countries and institutions will have to change their positions for a deal to be achieved this week, “Nein Bazooka”.
  • EUR: EU activity remains weak, with October IP data weaker in Italy (-1%), the UK (-0.7%) and Norway. These numbers are consistent with the soft PMI surveys and suggest expectation of a sharp slowdown in Q4.
  • Germany: In contrast, German IP surprised stronger with a +0.8%, m/m, gain, much higher than the +0.3% expected.
  • Germany: Officials rule out decisions on IMF aid at summit.
  • EUR: Official comments continue to warn against excessive expectations for the summit meeting.
  • UK: BoE MPC announcement saw no change in the scale of the asset purchase facility. The minutes gave a clear signal that although the Bank’s projections warranted further policy accommodation, it was difficult to accelerate the pace of purchases. Nothing until February’s meeting. Market is leaning towards the committee announcing an additional +GBP75b of Asset Purchases.
  • UK: Next week’s CPI inflation data are likely to confirm that the peak for inflation is past.
  • ECB: reduced its benchmark rate by -25bp to +1%, matching a record low and offered banks unlimited cash while steering clear of any signal that they will buy more bonds to stem the region’s debt crisis.
  • ECB: The two 36-month Refi-Ops and full allotment for banks at fixed rate in translation is a form of QE. They will ease the collateral rules and accept ABS as collateral. For the first time they will cut the reserve ratio to +1% from +2% effective January 18 and discontinue fine tuning operations at end of maintenance period. Draghi indicated that all non-standard measures are temporary in nature.
  • EUR: The European Banking Authority said the region’s lenders will need to raise +114.7b euros in fresh capital.
  • EU: The EU Summit agreement was largely in line with expectations and the “draft” released on Thursday. It will represent another step in the direction of an integrated fiscal “compact”.
  • EU: There was an agreement on a semi-automatic fiscal rule. Members will bring forward the launch of the ESM to mid-July 2012. They announced the possibility of increasing the size of the ESM above €500b to be discussed next March. The highlight for Germany was the announcement of no PSI in the ESM as a precondition, but adherence to the “well established IMF principles and practices”. Voting is to be done by a qualified majority (+85%) instead of unanimity for the emergency procedure in case of the ESM. Finally, discussion about an IMF provision of an additional €200b of resources is to be confirmed in ten-days
  • EU: UK and Hungary are not supporting the agreement for now. The accord is a Euro area plus accord instead of being an EU one.
  • EUR: French IP was flat in October, a touch above the expectations for a -0.2%, m/m drop.
  • NOK: Headline inflation fell to +1.2%, y/y, this month from +1.4%, weaker than the Norges Bank forecast of +1.6%. Core-inflation also came in weaker than expected at +1%, y/y. The Norges Bank expects the rise in prices to slow ahead for the first-time in two years. It remains a close call if the Norges Bank will ease next week.
  • GBP: October UK trade balance came in much better than expected with the trade deficit narrowing to -£1.6b from -£4.3b in September. The improvement was broad based.
  • SEK: Swedish IP surprised stronger than expected, rising +0.4%, m/m, vs. the consensus forecast for a -0.5% drop. The trend, however, remains weak, with IP contracting -1.9% on a three-month momentum basis.

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