Dollar Declines Amidst More Speculation of a Greek Bailout

Highlights

The US dollar is lower against most currencies with the European currencies leading.  Talk of an EU rescue package for Greece on the order of 55 bln euros has contributed to the moves helping to trigger stops.  The euro briefly broke up out of the $1.3436-$1.3788 range in which the currency has been trading since Feb 17th although the breakout has not been sustained.  The Swiss franc is outperforming the euro with the euro cross breaking down to set another new low for the cycle.  The Scandinavian currencies, which tend to benefit as risk subsides, are amongst the top performing currencies today and in the absence of any key Scandinavian news.  The central European currencies are the top performers amongst emerging currencies.  Warnings from Japanese FM Kan about possible intervention has helped bolster the crosses against the yen and limited the currency’s gains against the dollar.  The Canadian dollar is at new highs for the cycle with the US dollar trading below C$1.02 after details of Canadian Feb employment showed a sharp, 60K gain in full time workers.  A drop in temp workers still saw jobs rise 20K (15K exp.)  The data could shift expectations in favor of an early H2 hike.  As our intraday note suggested, Canada shares a number of favorable fundamentals with the US and is likely to match US growth with the BoC hiking before the Fed.   

Global equity markets are generally firmer.  In Asia, Japan’s Nikkei continued to rise, helped by the softer yen.  The index closed up 0.6% today and 3.7% on the week.  Talk of an extension of Q/E at next week’s BoJ meeting also supported shares with all sectors except oil and gas gaining on the day.  By contrast, China’s Shanghai Composite closed down -1.2% while the Hang Seng and Taiex lost modest ground amidst speculation of a hike in the reserve requirement this weekend.  Yesterday’s firm CPI data is playing a role but the market is also focusing on the fact that today is Mar 12th and the last time China raised reserves was Feb 12 and the time before was Jan 12.  Chinese yuan forwards have continued to rise amidst the speculation with non deliverable forwards pricing in a 2.97% appreciation over the next 12 months, near the highest level in 2 months.  European bourses are firmer on the day with the Stoxx Europe 600 gaining for the second consecutive week.  Early indications suggest US markets will also open higher. The MSCI Emerging Markets index is up 0.4% on the day.

Global sovereign bonds are generally softer.  In Europe the German 2- and 10-year bonds remain near their lowest levels in three-weeks with the yields up 1 bp amidst talk of a Greek bailout.  However, Greek yields are only slightly lower with the 2- and 10-year down about 5 bp.  Spanish and Portuguese 10-year yields are up just 2 bp.  Indonesia’s debt rating was raised one level to BB by S&P with a positive outlook.  The rating was last increased in 2006 and is now on par with Turkey.  Fed Pres Yellen is rumored to be Pres Obama’s choice to replace retiring Fed Vice Chairman Kohn.  She is known as a dove but that may reflect the fact that as San Francisco Fed President, she oversees a region hit hard by the real estate collapse.  Over the years she has proven to be pragmatic.

Currency Markets

The euro has set a marginal new high in what appears to be a short covering rally.  The single currency took out the $1.3788 high reached Feb 17th and approached the $1.3800 area but is now trading back below the $1.3788 area.  News from an Austrian newspaper (Der Kurier) claiming that a German and French led bailout for Greece on the order of 55 bln euros is in the works has contributed to the euro’s gains.  We estimate that up until last week, Greece had raised roughly a quarter of this year’s funding needs.  Given the recent bond sales, the amount the country needs to raise for this year is now 35 bln euros.  The 55 bln euro package that the Austrian paper is discussing is said to be comprised of 20 bln from Germany of which 10 bln is in loan guarantees.  France is said to be providing an additional 10 bln euros with the remainder coming from other EU countries but excluding Spain, Portugal and the UK.  It is expected to be unveiled in early April before the second evaluation report due in May.  After drifting higher in Asia, this report helped spur the euro rally that lifted the single currency toward $1.3800 in the European session.  This is not the first report of a bailout.  So far bailout strategies seem to be trial balloons.  We note that an article in Le Monde today suggests that EU finance ministers will consider two options, one including bilateral loans from the EU states to Greece and the second involving EU borrowing on behalf of Greece with the loans guaranteed by EU state.  Le Monde cites confidential documents as its source.  With nothing concrete, today’s moves appear to be driven simply by speculation that helped fuel some position squaring in an overextended market.  

The US dollar’s broad pullback is obscuring two otherwise noteworthy developments in Japan.  First, both the prime minister and the finance minister made a none-too-thinly veiled threat of foreign exchange intervention.  Although one investment house was quoted on the wires late yesterday suggesting the odds of intervention stood at 47%, we suspect this verbal outburst is part of the on-going battle between the MOF and BOJ.  Even though the latter may take another step this month or next to combat deflation, the MOF wants more action.  As we have suggested one of the possible actions is to simply increase the JPY10 trillion 3-month financing facility launched at the end of last year and that has nearly been exhausted.  The government could order intervention if it so decided and that was the message the government was sending.  The fact of the matter is that 3-month implied dollar-yen volatility is today at its lowest level since the Lehman collapse.  The three-month risk reversals, which are a gauge of the market’s bias toward dollar-yen calls or puts is the smallest since early 2007.  Lastly we have acknowledged that the new budget includes an increase in financing bills, which are used to raise intervention funds.  However, the JPY5 trillion increase is modest compared with the existing authority for another JPY30 trillion before hitting the current cap.  The real obstacle to intervention has not been material capability but political will.  With the trade surplus growing and exports growing and the yen volatility steadily declining for the better part of the past two months, intervention threats are best understood within the context of Japanese domestic debate and not an international signal.

Upcoming Economic Releases

US retail sales are due at 8:30AM EDT/13:30 GMT.  The consensus expects headline sales to fall -0.2% in Feb (after gaining 0.5% in Jan) while the ex-auto and gas component is expected up 0.3% (vs. 0.6% in Jan.)  The risk is to the upside given the improvement in the retail component of ISM and of payrolls.  At 9:55AM/14:55 the Michigan confidence data for March are expected to rise to 74.0 from 73.6 in Feb.  That would be the second highest reading since Jan08.  The 5-year inflation expectations component is likely to remain subdued.  At 10AM/15:00 Jan business inventories are exp up 0.1% vs. -0.2% in Dec.  The ECB’s Trichet speaks at 3:45PM/20:45 in Stanford Conn.  There are no scheduled Fed speakers ahead of next week’s FOMC meeting.  Note that the US shifts their clocks ahead one hour to daylight savings time on Sunday.

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Marc Chandler is the global head of Brown Brother Harriman’s top ranked Currency Strategy Team. For more of BBH’s currency views, please visit the BBH FX website here.

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