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* Greek debt crisis continues to hang over the euro…
* Moody’s says the UK and US debt ratings are secure, for now…
* Swiss National Bank lets the franc appreciate…
* Lots of data on tap in the US this week…
And Now… Today’s Analysis!
Greek debt is the euro’s Sword of Damocles….
But the dollar got a chance to shine a bit this morning in early
European trading, snapping three days of gains for the Euro. European
finance ministers begin a two day meeting in Brussels this afternoon,
but the German and French finance ministers damped speculation of a
bailout for Greece. German Finance Minister Wolfgang Schaeuble
continues to insist Greece must ‘go it alone’ and he was joined by
French Finance Minister Christine Lagarde over the weekend. Both feel
that 4.8 billion euros in budget cuts will put Greece back on track.
But the markets don’t agree, and the euro got hit; dropping almost a
full cent from its highs on Friday. The euro had rallied back to
within a smidge of $1.38, matching the 30 day highs for the common
currency. The Greek debt crisis will continue to hang over the euro
like the Sword of Damocles. Analyst has told the Greek story of
Damocles to everyone on the desk, but its been a while since he wrote
about it in the Pfennig, so here is a brief explanation of the ancient
Greek story:
Dionysius (II) was a fourth century B.C. tyrant of Syracuse, a city
in Magna Graecia, the Greek area of southern Italy. To all appearances
Dionysius was very rich and comfortable, with all the luxuries money
could buy, tasteful clothing and jewelry, and delectable food. He even
had court flatterers to inflate his ego. One of these was the court
sycophant, Damocles. Damocles used to make comments to the king about
his wealth and luxurious life. One day when Damocles complimented the
tyrant on his abundance and power, Dionysius turned to Damocles and
said, “If you think I’m so lucky, how would you like to try out my
life?”
Damocles readily agreed, and so Dionysius ordered everything to be
prepared for Damocles to experience what life as Dionysius was like.
Damocles was enjoying himself immensely… until he noticed a sharp sword
hovering over his head, that was suspended from the ceiling by a horse
hair. This, the tyrant explained to Damocles, was what life as ruler
was really like.
Damocles, alarmed, quickly revised his idea of what made up a good
life, and asked to be excused. He then eagerly returned to his poorer,
but safer life.
So today’s Greek debt crisis is the euro’s Sword of Damocles,
threatening to fall and slice through the common currency. Only time
will tell if the Greeks will be successful in their efforts to
refinance their debts. For now, the focus of international currency
speculators is locked on this story, and until some other event or
crisis draws their attention, the euro will continue to be fairly
volatile.
One thing which could shift the focus of the currency markets is a
story which appeared in today’s WSJ. Moody’s released their quarterly
Aaa Sovereign Monitor report this morning, confirming the triple-A
ratings of the US, UK, and Spain. But the report said these countries
have moved ’substantially’ closer to losing their Aaa ratings as the
cost of servicing their debt continues to rise. “At the current
elevated levels of debt, rising interest rates could quickly compound
an already complicated debt equation, with more abrupt rating
consequences a possibility,” said Pierre Cailleteau, Managing Director
of Moody’s Sovereign Risk Group. The US will spend more on debt
service as a percentage of revenue this year than any other top rated
country except the UK. According to the report, the US and UK are
maintaining their Aaa rating because of their ability to raise taxes
and force spending cuts on discretionary programs.
The pound continued to fall over the weekend, holding just above
$1.50 as a poll showed the elections to be held shortly may end in a
‘hung’ parliament. A YouGov Plc poll published in yesterday’s Sunday
Times showed Labour at 33 percent, the opposition Conservatives at 37
percent, and the Liberal Democrats with 17 percent. UK Prime Minister
Gordon Brown stepped up his attacks on the conservatives, saying the
Conservatives would ‘wreck the recovery’ with their planned budget
cuts. A hung parliament would make it more difficult to tackle the
budget problems in the UK, adding to the problems pushing the pound
sterling lower.
Another report showed there are currently more wager on the pound
weakening against the dollar than when George Soros made his fortune
betting against the pound in 1992. Futures traders have over 8 times
more wagers on the pound weakening vs. the US$ than when Soros forced
the pound from the European Exchange Rate Mechanism. Seems like
everyone is starting to climb aboard the bandwagon, a little late to
the party, but still not good news for the sterling.
The Swiss franc rose to its strongest level in nearly 1 1/2 years
against the euro this morning. A Swiss government report showed annual
producer and import prices declined at the slowest pace in more than a
year, dampening fears of deflation. Economic growth seems to be taking
hold, and the Swiss National Bank has been quite in the currency
markets, letting the franc appreciate. The SNB sold francs last year
in order to hold down its appreciation vs. the euro, but they seem to
be willing to accept a higher franc given the recent economic data.
With the Greek debt problems continuing to keep the euro volatile,
investors may be wise to look at the Swiss franc as an alternative.
The one currency which rallied vs. the US$ over the past trading day
was the Canadian dollar, which was up slightly. Investors moved toward
the Canadian dollar as they bet the Canadian central bank will move to
raise rates earlier than their US counterparts. Recent data released
over the past month show the Canadian economy is recovering a bit more
quickly than here in the US. Interest rate markets are pricing in a 22
percent chance of a quarter point raise by the BOC at their June
meeting, and a 100 percent chance of an increase at the July meeting.
If the BOC moves prior to the FOMC, the Canadian dollar would likely
move through parity; a level we haven’t seen since July of 2008.
The other commodity currencies of AUD and NZD pared their recent
gains as risk returned to trader’s screens. The Moody’s report, and
continued worry over the Greek debts has moved investors away from
riskier assets, causing a pullback by both the Aussie $ and kiwi.
These currencies will benefit whenever there is positive news regarding
global growth, and get sold off on any news calling the global recovery
into question. These currencies are momentum trades, and will continue
to rise and fall with global economic predictions.
We have a pretty big week of economic data here in the US, and start
the week off with the volatile Empire Manufacturing number, followed by
the net TIC flows, industrial production, and capacity utilization all
scheduled to be released today. Tomorrow will give us a picture of the
US housing market, with Housing starts and building permits along with
the Import Price Index. We will also get the FOMC rate decision, which
is pretty much of a foregone conclusion with rates remaining at their
current .25% level. Wednesday will bring us the PPI numbers along with
mortgage application data. Finally, Thursday will be a busy data day
with the weekly jobs data along with CPI, the Current Account Balance,
and leading indicators for February.
Like I said, we have a full slate of economic data this week; so
strap yourselves in, as this get a bit volatile. Running a bit behind
this morning, so I will get right to the currency wrap-up:
Currencies today 3/15/10: American Style: A$ .9133, kiwi .7011, C$
.9818, euro 1.3727, sterling 1.5053, Swiss .9446, European Style: rand
7.400, krone 5.8426, SEK 7.0811, forint 193.55, zloty 2.8401, koruna
18.6025, RUB 29.3425, yen 90.71, sing 1.3968, HKD 7.7586, INR 45.618,
China 6.8262, pesos 12.579, BRL 1.7624, dollar index 80.112, Oil
$80.75, 10-year 3.69%, Silver $17.07, and Gold… $1,107.10
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