EUR: A Greek Deal In The Works?

Posted by: Kiara Eva / On: June 21, 2011 / No Comments »

  The challenge for Greece has always been getting domestic support for the austerity measures and the people certainly don’t want any further belt tightening. A general strike in Greece will be held on June 28 and 29 and it can still get ugly if the protests turn violent.  The EU and IMF would be happy to hand over their next bailout payment to Greece as long as the austerity program is approved by Parliament.  This step still needs happen before Greece receives any money from the EU and IMF.  Despite this technicality, the euro is trading higher on the hope that Greece reached a back room deal with the EU/IMF because they are confident the austerity program will be passed.  The Parliament vote is scheduled for next week and we won’t know exactly how long this will drag out until the results are announced.

In the meantime, our focus will be on German economic data.  The IFO report is scheduled for release tomorrow and we believe that sovereign debt troubles will put a dent in German business confidence.  The latest PMI reports showed manufacturing activity slowing materially and even though part of that was offset by stronger service sector activity, exports have been hit hard by slower U.S. and Asian growth.  The volatility in the financial markets and the focus on Greece will not make businesses feel any better and for this reason we believe there is a good chance German business confidence weakened in the month of June.  PMI numbers from the Eurozone in general missed expectations, raising concerns about the pace of growth in the region.  The Swiss Franc on the other hand continues to perform well thanks to stronger economic data and the desire for safety.

USD: MORE SIGNS OF WEAKNESS IN US ECONOMY

The late day recovery in U.S. stocks and in the EUR/USD was extremely impressive but a deal for Greece does not resolve the other issues weighing on the markets earlier in the trading day. Weaker economic data from nearly all parts of the world (U.S., China and Europe) sent investors back into the arms of the low yielding U.S. dollar. Even with today’s intraday recovery, the dollar ends the North American trading session higher against all of the major currencies.  The International Energy Association announced the release of emergency oil stockpiles this morning, which helped to drive the price of crude below $90 a barrel for the first time since February intraday. A decline in oil prices will not only make life easier for everyone around the world but also central banks who will now be able to maintain easy monetary policies for a longer period of time. After the Federal Reserve left interest rates unchanged on Wednesday, Bernanke acknowledged that the central bank has no idea about how the economy will perform going forward. The latest U.S. economic reports give the Federal Reserve more reasons to be concerned. Jobless claims rose to 429k from 420k the previous week. Upward revisions to the last report and the increase in claims suggests that the labor market remains weak. Continuing claims held steady at 3.697 million after also being revised higher the prior week. Bernanke described the recovery in the labor market as frustratingly slow and unfortunately the jobless claims report shows very little progress which is why USD/JPY has not been able to muster a significant rally. New home sales fell for the first time in 3 months by 2.1 percent to 319k units from 326k. Although the pullback in sales was not as large as economists had feared, the decline in prices and the downward revision to last month’s report overshadows any silver linings in the report including the minor improvement in the number of months that inventory remains on the market. As you can see from the muted reaction in USD/JPY, the smaller decline in new home sales is not enough to erase the negative sentiment.  Durable goods orders and the final first quarter GDP numbers are scheduled for release on Friday.  After a sharp decline in April, durable goods are expected to have rebounded in May.

GBP: POTENTIAL CUTBACK IN SPENDING IN JUNE

The British pound continued to weaken against the euro and U.S. dollar as traders adjust their positions to account for less hawkishness within the Bank of England. It will be difficult for the GBP/USD to recover without some significantly positive surprises out of the U.K. According to the Confederation of British industry, retail sales continued to weaken in the month of June.  The CBI Distributive Trades survey turned negative for the first time since August 2009.  This data suggests that consumer spending has not recovered since the burst in April and if anything has taken a turn for the worse. With household incomes falling and the economy weakening, consumer spending has suffered greatly.  If the CBI report accurately telegraphs a decline in retail sales, sterling could be in for more losses.  The housing market on the other hand rebounded slightly in May with mortgage approvals rising last month.  Earlier this week we learned that house prices in London continued to rise which may be indicative of a bifurcated housing market in the U.K.  No U.K. economic reports are scheduled for release tomorrow and we continue to expect sterling to underperform.

CAD: HIT BY EMERGENCY OIL STOCKPILE RELEASE

Amidst the drop in commodity prices led by oil and gold futures sell-off, the US dollar gained ground against the New Zealand and Canadian dollar. With the International Energy Agency releasing 2 million barrels of oil a day for 30 days, the price of oil tumbled to its lowest level in four months. In addition, the global economic slowdown and uncertainty with the end of QE2 drove the market away from high risk currencies and into the safer greenback. Up north, although the Canadian economy is on a sound footing, the strength of its economy still largely hinges on its major trading partner, the US. While the rest of world is looking for ways to deleverage, a new study found that the average Canadians are saving less than one year ago. With an increased debt load, the financial stability would be weakened. As the Bank of Canada Governor Mark Carney pointed out, “The high level of household indebtedness has increased financial vulnerabilities in Canada. Thus, the BoC is carefully watching the effects of the federal government’s measures to moderate the pace of debt accumulation. With the Conference Board leading index printing at 0.1 percent in May reversing its decline from April, the Australian economy still faces a slow recovery.  While the Australian economy is faring better than most parts of the world, the Reserve Bank of Australia is still hesitant to raise the rate too quickly. Many parts of the domestic economy are still showing signs of stress and weakness. Although the Westpac leading index and Conference Board index showed various pace of the recovery, both releases indicated a weaker growth momentum. Once there are more affirmative and sustainable signs in the economy, the RBA would surely have a less ambiguous attitude towards interest rates. With no economic releases scheduled from the three commodity countries, the fate of the comm. dollars will hinge upon developments in Greece and US data.

JPY: CORPORATE VICTIMS

The Japanese yen strengthened against all the major currencies with the exception of the greenback and Swiss franc on concerns the global recovery is slowing.  Weaker economic data from nearly all parts of the world (U.S., China and Europe) pushed investors toward safer havens and away from riskier assets.   Nissan Motor Co., Japan’s second-largest automaker, expects full-year profit to fall 15 percent after the March 11 earthquake disrupted production and sales while the yen strengthened.   Similar announcements have already come from automakers Toyota and Honda.  Japanese car factories and parts plants are boosting production as they recover from the natural disaster that lead to a 60 percent plunge in domestic vehicle output in April.  Nissan expects to resume full production globally by October.  Also caused by the quake, Zinc production will fall by at least 9 percent this year, doubling imports to the highest level in 11 years, said the nation’s top producer of the metal used to galvanize steel.  Japan may import as much as 80,000 tons this year, the highest level since 2000.  Japan was Asia’s third-largest zinc consumer after China and South Korea in 2010, according to the International Lead & Zinc Study Group.  As the country continues to recover from the natural disasters, massive kilns are roaring back to life, incinerating tons of wood and plastic debris from destroyed buildings.  Japan’s central government estimates that nearly 25 million tons of smashed concrete, steel, wood and other detritus from stricken coastal cities must be cleared away and properly disposed of to make room for rebuilding.   Completing this enormous task is estimated to cost more than $8.4 billion and take at least three years.   The quantity of debris in the three areas hit hardest by the earthquake and resulting tsunami is equivalent to more than a decade’s worth of the region’s normal solid-waste output.  It far surpasses the 14.5 million tons that had to be cleaned up after the Hanshin quake, which hit the southern port city of Kobe in 1995.  On the docket tonight is Japan’s year-over-year corporate service prices for the month of May.

EUR/USD: Currency in Play for Next 24 Hours

The EUR/USD will be our currency pair in play for the next 24 hours.  From Germany, we will have the IFO report for the month of June scheduled for release at 4:00 AM EST / 8:00 GMT.  Tomorrow also marks day 2 of the European Union Economic Summit.  From the United States, durable goods orders and the final first quarter GDP numbers will be released at 8:30 AM EST / 12:30 GMT.

The EUR/USD has seen a lot of volatility in the past month due to the Greece debt crisis and ensuing protests and strikes.  Every movement in the pair seems to hinge on the next piece of news that comes from the region.  The pair is currently trading in a down trend, which we determine using Bollinger bands.  The nearest support is the psychologically significant 1.4000 level.  If the pair falls below this price, significant support will be found at the 200-day simple moving average of 1.3851.  On the upside, first resistance will be encountered at the 50-day simple moving average of 1.4410.  Should the pair break out of this level, heavy resistance will be found at the upper first standard deviation Bollinger band price of 1.4545.

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