US Dollar Surrenders Recent Gains on Hope that the Greek Aid Package Will be Activated within Days
The US dollar is surrendering its recent gains against most major and emerging market currencies today amid reports that new substantial Greek savings (24 bln euros) will be sufficient to spur a larger (100-120 bln euro) aid package that could be ready in days. The yen has also suffered in this less anxious environment. Polls suggesting the Tory’s Cameron put in his best showing in last night’s debate may be helping sterling. Month-end considerations are also thought to be helping sterling. While some the imminent funding for Greece may be at hand, it is far from clear that the euro zone debt crisis is over. The euro has risen through the $1.3325 objective. The next target is near $1.3400. Sterling has neared $1.5400, but the real cap is closer to $1.55. The dollar is trying to establish a beachhead above JPY94.00. Resistance is seen near JPY94.80. While the short-term technical indicators suggest the foreign currencies are over-extended, and the US is likely to report a robust Q1 GDP, the month-end and the uncertainties about the actual details of the Greek funds, may discourage aggressive picking of a dollar bottom today.
Global equity markets are moving higher in the wake of yesterday’s advance in the US, underpinned by higher commodity prices, mostly favorable earnings reports and, of course, an easing in the European debt woes. The MSCI Asia-Pacific Index snapped a 3-day losing streak to rise 1%, even the Shanghai Composite managed to eke out a small gain (less than 0.1%) and finished the month off 7.7%. Korea’s Kospi rose 0.8% following a strong industrial production report and a strong earnings report from Samsung, which included a seven-fold rise in profits. Taiwan’s market bucked the trend with a 0.6% decline, but the real signal is that foreign demand for Taiwanese shares this month was more than the total in Q1, while foreign purchases of Korean shares amounted to nearly half of this year’s equity inflows. Meanwhile, the small gains the European bourses are posting near midday are masking broad divergence. Utilities, technology, including telecoms, and financials are higher, while basic materials, consumer discretionary and health care are lower. A disappointing earnings report from Barclays weighed on UK financials.
European bond markets reflect the relaxation of tensions as spreads, especially in the shorter coupons, like the 2-year sector, have narrowed. At the same time, German bunds are also firm, suggesting that the safe haven bid may be being replaced with an appreciation that fiscal retrenchment will likely impact growth trajectories. US Treasuries are flat ahead of the first look at Q1 GDP. On the month though, US 2-year yields are off 6 bp, while the 10-year yield is off 12 bp.
There are two main forces at work today in the global capital markets. The first is the signal from various sources that the aid package for Greece is at hand, following new substantial savings by the Greek government. It now looks like something could materialize over the weekend. The second force is month-end consideration as positions and hedges are adjusted. The combination of these two forces may discourage resisting the moves in the foreign exchange market today. We do think this is what will take place even if not today. Nearly everyone realizes that the short euro position was a crowded trade. It is evident not only by its persistent downtrend, as momentum and trend followers participated, and the Commitment of Traders in the futures market, but we also note that the premium of euro puts over euro calls, equidistant from the forward strike, were at their largest premium yesterday since Oct 2008. The euro has rallied a little more than 2 cents since Wed’s low near $1.3115. There has been talk today of European sovereign euro demand related to month-end considerations and this may be helping fuel the euro’s short-covering bounce.
Calling what is taking place a “Greek bailout” is a misnomer. The funds that the European governments and the IMF are going to make available to Greece are not going to stay in Greece. The money will used to service Greece’s debt, of which something close to 70% appears to be in foreign hands (admitted estimates vary). With various spending cuts, wage cuts and job losses, it is hard to see how Greece itself is being bailout out. Instead of Athens that is being made whole, it is Greece’s creditors that are. The so-called Greek bailout is essentially another bank bailout and a transfer of (European) government funds to European banks. Greece is merely a middleman. While other bond markets in southern Europe are benefitting from strong ideas that a Greece will be given funds in time to avoid problems with the May 19th maturity and coupon payment, it is far from clear that investors will be satisfied for long. News today that Spanish unemployment rose to 20.1% in Q1 from 18.8% in Q4 09 illustrates the kind of economic headwind the periphery of Europe faces. This was a larger rise than economists expected and is around 7 times the EU average. Consider that since joining the euro zone Portugal has average less than 0.5% growth a year or that S&P expects Spain to average around 0.7% annual growth through 2016. It is difficult to see how the European/IMF package is scalable or how it really gets ahead of the curve of expectations or shows any appreciation for the fact that underlying the debt/deficit issues is really a competitive issue. So, there is a small reprieve, but color us skeptical about real closure.
Japan released a slew of economic data, none of which was particularly inspiring. Unemployment ticked up to 5.0% from 4.9% in January and February. The job-applicant ratio rose to 49 from 47, but it is still dismal (49 job opening for every 100 applicants). Industrial output rose 0.3% in March. The market had expected a 0.8% increase after a 0.6% decline in Feb. The MOF survey picked up expectations of a further decline (-0.3% rather than -0.1%) for April’s manufacturing output, but a large rise in May (3.7%). Core inflation fell for the 13th month in March with little change in the pace and, if anything, deflationary forces strengthening in Tokyo in April. New BOJ forecasts were largely in line with expectations GDP revised this year to 1.8% from 1.3%, but next year’s forecast was shaved to 2.0% from 2.1%. Core CPI, which excludes fresh food, is expected to fall 0.5% this year before rising to 0.1% next year (previously was -0.2%). Bottom line here is that pressure is likely to remain on the BOJ to take additional steps to spur lending and arrest deflation.
Upcoming Economic Releases
The US reports Q1 GDP. The consensus is for a 3.25%-3.5% expansion, with stronger household consumption and capex; inventories also contributed. Watch the core PCE deflator. It is likely to have fallen back to 0.5% from 1.8% in Q4 09. Chicago PMI is out (10:00 ET/14:00 GMT) should also show expansion continues into Q2. Canada reports Feb GDP. Look for a 0.3% increase.
This was the BBH CurrencyView by Marc Chandler. Marc 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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