US Dollar Surrenders Earlier Gains Following Greek Announcement


The US dollar has surrendered earlier gains that pushed the euro lows not seen in nearly a year, just above $1.3200, before reports spurred speculation that Greece will seek to activate the backstop facility.  The euro traded to almost $1.3350 as some shorts moved to the sidelines.  There was talk of sovereign interest as well as short-covering by high frequency traders.  Disappointing Q1 GDP data from the UK, where the 0.2% expansion was half of the consensus forecast weighed independently on sterling.  This disappointment does UK PM Brown no favors, especially after polls indicate he lost last night’s debate, though marginally.   The other mover among the majors, the Australian dollar is heavy following comments from RBA Governor Stevens.  By identifying current interest rates as near average, Stevens sparked second thoughts about a rate hike next month.  The Australian dollar fell to $0.9180 before finding support.  The yen appears largely sidelined today. 

Asian equity markets fell, but European bourses are higher amid hopes of some resolution to the Greek drama. A better than expected German IFO and EMU orders data may have also helped European bourses extend gains.  The Athens bourse is up around 4%, with the financial leading the way, as speculation of that the multilateral facility will be drawn upon trumps Moody’s lowering of the National Bank of Greece’s credit rating.  Throughout Europe, the industrials, basic materials and technology are the strongest sectors.  Earlier, the MSCI Asia-Pacific Index was off 0.5%, to cap a poor week.  Japan’s Nikkei slipped 0.3%, and the 1.7% decline on the week makes it’s the weakest since late Jan.  The Shanghai Index was off about 0.5%, for a 4.7% drop on the week, its worst weekly performance in five months.  Thailand’s main index fell over 1% as the violence around the protests appears to be threatening a military response. 

A sense that the Greek crisis is reaching a climax of sorts today has seen the peripheral European bond markets stage a sharp recovery after yesterday’s dramatic slide.  This coupled with stronger German and euro-zone data and the rally in equities is forcing unwinding of some safe haven flows.  This is weighing on German bunds and Treasuries.  Gilts are underperforming, despite the disappointing preliminary Q1 GDP report.  There are some fears that a hung parliament (coalition government) will not be able to address fiscal policy in a decisive way.

Currency Markets                                                                                       

Events in Athens are dominating the focus in the foreign exchange market.  After yesterday’s blowout following the Eurostat report finding that last year’s deficit was even larger Greece (and Ireland) than previously reported and the Moody’s downgrade of Greek debt, initiating the emergency backstop facility appears to have become inevitable. In fact, PM Papandreou formerly announced that it is seeking to activate the Eur45bn aid package in late European session. We do not have any more details regarding what may be asked from Greece at this point.
Initially in Asia, the euro fell to almost $1.3200 and speculation that Greece would use the funding mechanism saw a powerful recovery in the euro.  The issue now is whether it is too late and what was once seen as a liquidity crisis has morphed into a solvency problem.  We have several concerns.  First, the size of the facility is sufficient to covers this year’s remaining needs and part of next year’s.  This would suggest that Greece may still try to raise funds when market conditions allow for it.  However, a multi-year program is likely necessary and European officials seem to have to be dragged kicking and screaming into this recognition.  Second, officials seem to be stuck in a reactive mode and have not been able to get ahead of the curve.  Specifically as recently as yesterday, IMF head Strauss-Kahn ruled out a preemptive package for Portugal and/or Spain, arguing there was no need.  Hence we are still concerned about contagion.  Third, we remain concerned that the underlying issue of competitiveness in the periphery of Europe is not really being discussed as the focus is largely on Greece’s ability to service its debt.  One of the consequences of the fiscal austerity that is being mandated is that it will keep aggregate demand suppressed and could then still produce a widening of the output gap in Europe.  Therefore on balance, we would be inclined to fade the euro rally. For the better part of the past six months, European officials have disappointed investors by not delivering satisfactory closure and we suspect the risk is for more of the same.  Looking at specific levels for the euro, we note initial resistance near $1.3350. A move above there would likely be checked in the $1.3400 and then $1.3450 area.  On the downside now, a move back to $1.3250 is possible on any disappointment.  Over the medium term, the issues outlined here, within the context of an expanding US economy (~3%) will likely push the euro back below $1.30 with a move toward the mid-$1.20s a reasonable target.

While Greece is the dominant factor today, it is not the only development. The UK is the first G7 country to report preliminary Q1 GDP figures.  They were disappointing.  The consensus expected a 0.4% expansion and instead ONS said the economy expanded half as much.  The 0.2% rise was also half the pace reported in Q4 009.  Nevertheless, because of the base effect, the year—over-year contract eased to -0.3% from -3.1% in Q4 09.  The economic trough was hit in Q2 at almost -6.0%.  The preliminary report indicated that services expanded 0.2%, while industry expanded by 0.7%.  After apparently losing the first two debates, Prime Minister Brown is likely to come under even more pressure in the weekend press.  There is much talk that even if Labour wins a small plurality of votes, that as a condition of a coalition government the Lib-Dems may rule out Brown as Prime Minister.  There is also talk that Lib-Dems Cable could be a likely candidate for Chancellor of the Exchequer. We will have an extended discussion in a SpecialFX piece next week.  For now support in sterling is seen in front of $1.5300 and a cap near $1.55.

After what appears to have been a slow start to the year, after a near stagnant Q4 09, the German economy appears to have picked up momentum as first quarter progressed.  This has been the message of the recent string of economy data and was driven home by today’s stronger than expected IFO survey.    The business climate reading came in at 101.6 (98.2 last), the highest since May 2008.  The assessment of current conditions and expectations also rose.  The weakness in the euro may also be helping sentiment as Germany exports around 40% of GDP (roughly the same as China).  Separately, the euro zone reported a 1.5% rise in Feb industrial orders, well above expectations and largely offsets the 1.6% decline in Jan.

Upcoming Economic Releases                                                                       
The US reports durable goods orders (8:30 EST/12:30 GMT) and new home sales (10:00 EST/14:00.GMT).  Both are expected to post modest increases.   Canada reports March CPI figures at  7:00 EST/11:00 GMT.


Marc Chandler is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.

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