Posted on 30 March 2010
Low Fed Rates Could Fuel Dollar Rally
Some currency Analysts believe that the Federal Reserve’s recent decision to keep rates at record lows could fuel a dollar rally against the euro and the British pound throughout 2010. Normally low central bank rates are negative for currencies but experts believe if the Fed’s low rated help to promote growth in the US economy that outpaces the euro zone and the UK the dollar will attract save haven investors throughout 2010. Recent economic reports indicate that the US is recovering from the recession at a faster pace than the euro zone and Britain. Many expect commodity linked currencies to rally vs. the dollar as commodity prices rise. Commodity linked currencies include the Australian dollar, the New Zealand dollar and the Canadian dollar. All of these countries have already raised rates and all have commodity driven economies. More than a few currency experts believe that the Canadian dollar will achieve parity with the US dollar sometime this year.
Aussie at Three Week High
On March 29th the Aussie dollar gained in advance of a report expected to show a rise in retail sales. The Aussie hit a three week high and most experts believe the Australian central bank will raise rates to 4.25%. The S&P/GSCI Index of commodities gained 0.5% and is near the highest level since March 19th prompting a rally in commodity linked currencies. The Aussie dollar gained 0.4% on the greenback trading at 92.16 U.S. cents and gained 0.6% on the euro trading at A$1.46. The Japanese yen fell 0.5% vs. the Aussie and traded at 85.24 per Australian dollar. The Canadian dollar rose 0.7% to C$1.0196 per U.S. dollar and most expect the currency to hit parity with the US dollar by June 2010.
Australian Central Bank to Raise Rates
Benchmark rates in Australia are currently 4% and are 2.5% in New Zealand. Australia is also in the enviable position of being one of China’s biggest suppliers of raw materials. These rates compared to US rates near zero and 0.1% in Japan makes the higher yielding Aussie and Kiwi attractive to investors. Reserve Bank of Australia Governor Glenn Stevens said that rates may be increased soon to control inflation. Stevens also said, “It’s not wise to leave interest rates right down at rock bottom any longer than you need. It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly.” The Kiwi gained in advance of a government report that is expected to show that home building approvals rose in February.
Posted on 27 March 2010
Dollar Will Continue To Strengthen vs. Euro Analysts Say
Many currency experts believe the US dollar will continue to strengthen against the euro as worries about the Greek debt crisis continue. The U.S. non-farm payrolls report for March is due this week and is expected to show that 168,000 new jobs were created and an unchanged unemployment rate. Analysts say that signs of economic improvement in the US could further support the greenback. A deal between the EU and the IMF to provide aid to debt ridden Greece has prevented a euro freefall but euro sentiment remains negative. John McCarthy of ING stated, “Although we have this agreement on a Greece aid package, it is somewhat unclear as to whether it is going to be applied, when is it going to be applied…and the fact is Greece still has considerable debt. What’s to say that we will not go through this again with Greece or Portugal. This is not going away in the immediate future.” Some experts believe that the euro is in a long term downtrend similar to the US dollar’s seven year decline in advance of the global recession.
Experts optimistic About US Jobs Report
Aside from the continuing Greek concerns among investors most investors will be focused on the US employment report which is expected to show that the worst of the recession may be over. A research note from Danske Bank said, “Although the February data continued to print job losses, there are several signs the March U.S. payroll report is a very likely candidate for a significant upside surprise. This would overcome some of the skepticism about the current job market recovery.” Two other reports are due this coming week, the U.S. Institute Supply for Management report and the Chicago manufacturing survey. Both are expected to show that the US economy is recovering.
IMF Role in Greece’s Rescue Unclear
At last week’s EU summit European leaders agreed to provide loans to Greece with the IMF’s help. IMF officials were unclear on how IMF funds would be accesses and how it could impose the conditions that usually come with IMF aid. The IMF issued a statement saying, “We are following developments closely, And as we have said earlier, the Fund always stands ready to consider a request from a member country for our financial assistance.” The EU has indicated that they would provide two thirds of the funding for Greece and the IMF would provide the other third. Last Thursday Greek Finance Minister George Papaconstantinou said that Greece would prefer to obtain finds through financial markets but that will depend on interest rates.
Posted on 25 March 2010
Investors Waiting For Greek Debt Solution
The euro rose from a ten month low vs. the US dollar as investors speculate that today’s EU summit could result in a solution for Greece’s fiscal problems. Diplomatic efforts in advance of the summit failed to resolve differences over how to aid Greece. France and Germany had held talks in advance of the summit to discuss what role the IMF will play in any Greek bailout. Jean-Claude Juncker, chairman of the euro zone finance ministers met with conservative EU leaders including German Chancellor Angela Merkel and said that he is confident that the EU summit will reach an agreement regarding aid to Greece by Thursday night. Junker stated, “My impression was that we would find an agreement today and now I do believe it really.” Some currency experts remain pessimistic; Boris Schlossberg of GFT stated, “Some traders are betting European leaders will be able to come up with a solution at this meeting and the euro is responding to that. But frankly, I believe markets are bound for disappointment and the euro is likely to resume declines.”
Portugal Downgraded
Concerns about Greece’s debt sustainability and the debt concerns of other EU nations have pushed the euro down 7% against the greenback so far this year. On Wednesday Fitch’s ratings agency downgraded Portugal’s rating prompting concerns that other EU nations face similar debt problems. Matthew Strauss of RBC Capital Markets stated, “The focus is on the EU meeting, though expectations have been scaled down quite significantly on whether there will be a firm framework for financial assistance to Greece,. Based on recent comments, it seems that’s not going to be the case, and as a result, we’ve seen pressure on the euro.” All eyes are on the EU summit and there have been conflicting statements from several EU leaders.
Greek PM Says Greece on the ‘Right Track’
The Athens government is hoping that a combination of tax hikes and wage cuts will bring Greece’s deficit to 8.7% of GDP this year. The 8.7% figure is still in excess of EU debt rules but well below last year’s 12.7% figure. Greek Prime Minister George Papandreou told reporters today, “We will move ahead whatever decisions are taken. Greece is determined to deal with its own problems,” he said, adding that “we are on the right track.” Some EU leaders believe that any solution involving the IMF will destroy the credibility of the EU and pressure the euro further. In a statement less than optimistic for those leaders pushing for an EU solution, Germany’s Merkel stated, “A good European is one who abides by the European treaties and national law and thus sees to it that the euro zone’s stability isn’t harmed.”
Posted on 22 March 2010
Nagging Greek Concerns Pressure Euro
Uncertainty about the prospect of an EU solution for Greece’s debt crisis continues to put pressure on the already troubled euro. Conflicting statements from EU leaders indicate that there is a serious political rift in the EU regarding aid to Greece. European Commission President Jose Manuel Barroso called for an EU based lending mechanism to be established at the EU summit this week. German opposition remains strong and German Chancellor Angela Merkel said in a radio interview that Greece does not have any “acute financial needs” and reiterated her opposition to any EU aid for Greece. Merkel stated, “I don’t see that Greece needs money at the moment and the Greek government has confirmed that. That’s why I’d urge us not to stir up turbulence in the markets by raising false expectations for Thursday’s council meeting. Aid will not be on the agenda at the meeting on Thursday because Greece says itself it doesn’t need help right now.” Barroso responded to Merkel’s statements in the German newspaper Handelsblatt and said it was urgent that EU members solve the Greek debt problem “regardless of the political agenda in member states”. Barroso further stated, “Securing the stability of the currency union is in Germany’s interest. I’m sure Germany will make a constructive contribution to resolving the current crisis.”
German Opposition to Aid
After Barrsos’s comments were published the Merkel’s government issued a statement saying Merkel had spoken to Greek Prime Minister George Papandreou Saturday and Papandreou told Merkel his nation does not need any help. The statement said, “The Greek prime minister reaffirmed that Greece does not need any financial assistance.” Italian Prime Minister Silvio Berlusconi, told an election rally that he is “absolutely in favour” of EU aid to Greece. Berlusconi also stated that the EU had “no reason to exist” if member nations were not ready to provide each other aid. Germany is concerned that direct EU aid could set a dangerous precedent for other EU nations in financial straits.
Greece’s Borrowing Costs High
Up to now Greece has not formally requested aid from other euro zone members and is eager to see whether current austerity measures are enough to restore confidence in the troubled nation. High borrowing costs are making it difficult for Greece to implement many budget cutting measures. Prime Minister Papandreou warned that Greece is “one step from being unable to borrow” putting the Athens government in a difficult position. All eyes will be on the EU summit this week which could determine the future of the euro.
Posted on 19 March 2010
Euro’s Credibility at Stake
The euro was introduced to global financial markets in 1999 and until recently the multi nation currency allowed the EU to compete with larger economies such as the US and Japan. For a while some nations held reserves in Euros as the US dollar fluctuated thanks to massive US deficits. The euro has been the second most widely used reserve currency after the US dollar and between its introduction in 1999 and 2008 the Euro’s share as a reserve currency grew from 17.9% to 26.5%. Recently the US dollar has recovered and is regaining its status and clout as a global reserve currency. Unfortunately some euro zone nations chose to live beyond their means most notable Greece. Investors fear that Greece’s problems will spread to other EU nations such as Portugal, Spain, Ireland and Italy. To maintain the euro’s credibility as a currency EU nations must adhere to monetary regulations designed to maintain a stable euro. Greece’s massive deficits are contrary to euro zone rules and threaten the stability of the euro and have also caused a political rift in the EU.
Greece May Turn to IMF For Aid
Greece is seeking help from the EU but many are speculating that help from the multi nation currency bloc may not be forthcoming. German opposition to EU aid for Greece has pressured the euro in global currency markets. Greek Prime Minister George Papandreou said that severe austerity measures and structural reform demonstrates the Athens government is committed to resolving Greece’s fiscal crisis but high borrowing costs are making it difficult for Greece to meet budget goals. Papandreou stated, “We will make it, provided that our country can borrow on reasonable terms. Based on those conditions, our country is not seeking and will not seek financial aid, either from our European partners or from the IMF, which would be our last resort.”
Merkel Says IMF May be the Only Solution For Greece
Papandreou said that Greece wants a decision to be made at the EU summit next week towards establishing a financial mechanism to aid Greece if needed. Papandreou said an EU decision could reduce borrowing costs for Greece making it unnecessary for the nation to turn to the IMF for help. German opposition to EU aid for the Athens government remains fierce. German Chancellor Angela Merkel told the German Parliament that the IMF may be the only answer to Greece’s problems. Expressing investor concerns Simon Derrick of BNY Mellon Corp. in London stated, “The euro is weakening as investors are questioning whether there really is a plan to support Greece. From an investor’s perspective, do you feel comfortable, in these circumstances, being heavily invested in peripheral Europe?”
Posted on 17 March 2010
UK Unemployment Claims Fall
The pound rose on Wednesday after better than expected UK jobs data. The UK government reported that unemployment claims fell by 32,000 in February the largest decline since 1997. The pound has been hammered by recent housing data and fears that upcoming elections could produce political gridlock crippling the nation’s ability to deal with economic problems. Commenting on the new employment figures Bank of Nova Scotia currency strategists Camilla Sutton and Sacha Tihanyi stated, “This is the fastest pace of decline in jobless claims since 1997. The pound has definitively broken to the topside and is challenging resistance.” The euro surrendered recent gains after a German government official said that EU finance ministers had made “no decisions” regarding aid to Greece. Ulrich Wilhelm said in Berlin that no decisions about aid to Greece are likely to be made at the upcoming EU summit. Opposition to aid for Greece is widespread in Germany. Boris Schlossberg of GFT Forex said, “The Germans have been the primary sticking point in creating a pan-European solution. Any resistance casts doubt on solving the Greece problem and helps push the euro lower.”
Dollar and Yen Pressured by BOJ, Fed Decisions
The US dollar and the yen fell after decisions by the Bank of Japan and the US Federal Reserve. The BOJ doubled its loan program designed to fight deflation and the US Federal Reserve said it would leave interest rates at historic lows. Rising oil and commodity prices combined with a rise in risk sentiment lifted commodity linked currencies such as the Canadian dollar, the Aussie dollar, Kiwi dollar and the S African rand. Andrew Wilkinson of Interactive Brokers Group stated, “Everything is doing OK against the dollar and the yen except the euro. Greece just won’t go away, and that doesn’t sit well with the market.” Twenty years ago Harvard University Professor Martin Feldstein called the newly created euro an “economic liability” and now warns that Greece’s austerity measures will fail and that Greece may have to exit the European Monetary Union to fix its massive debt problems. Feldstein said, “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy.” Feldstein has been an adviser to several US Presidents starting with Ronald Reagan.
Weak Euro Causing Problems
The weak euro has caused problems for European manufacturers. Since most raw materials such as oil are priced in dollars imported goods are more expensive and could lead to a rise in consumer prices. Until the EU comes up with a concrete solution for the Greek debt crisis downward pressure on the euro is expected to continue.
Posted on 10 March 2010
Yen Falls Against Most Majors
The Japanese yen fall against most major currencies on speculation that the bank of Japan will implement further monetary easing measures. Recently the yen has benefited from repatriation flows as Japanese corporations seek to repatriate funds before the end of the fiscal year. Most experts believe the BOJ leans towards monetary easing but disagreement among board members on how to justify such a move remains. A report that showed that Chinese exports gained the most in three years lifted investor risk appetite putting further pressure on the yen. Chinese sales gained 46% in February. Commodity linked currencies gained on the Chinese export data. Greg Anderson of Societe Generale SA stated, “There is a firm underpinning to the global economic recovery. The yen normally weakens when stocks go up and has been reluctant to do so the last few weeks. Now it’s playing catch-up.” The yen fell 1% against the euro to 123.60 and fell 0.7% vs. the US dollar to $1.3646.
Risk Sentiment to Improve say Experts
Better than expected data prompted carry trades where investors use currencies borrowed in nations with low rates to finance the purchase of higher yielding currencies such as the Australian dollar and Brazilian Real. The Chinese data helped the Aussie dollar since Australia is one of the chief suppliers of raw materials to China. Currency experts expect high yielding currencies to continue to perform well. Lee Hardman of Bank of Tokyo Mitsubishi UFJ Ltd stated, “Conditions will continue to improve on the risk-sentiment front, and the emerging-market currencies and commodity-linked currencies are likely to outperform over the coming weeks.” The Aussie dollar gained 0.6% hitting a seven week high vs. the US dollar and traded at 0.9186,. Analysts at Commerzbank said, “They (Australian and New Zealand dollars) are benefiting from good Chinese data which suggest that the economy there is expanding strongly.” The Kiwi dollar rose to a five week high gaining 0.9% and traded at 0.7087.
Euro Trading Volatile
Euro trading was volatile with gains and losses throughout trading sessions. On Tuesday the euro took a hit after Fitch’s ratings agency said it has a negative outlook for Portugal’s debt rating. A highly successful Portuguese bond sale lifted euro sentiment slightly. The euro was lifted after Greek Prime Minister George Papandreou met with US President Obama and said that Obama expressed support for Greece’s austerity measures. Papandreou told reporters, “We’re not asking for a bailout, we’re not asking for financial help from anyone. What we are doing is first of all revamping our own economy. We are taking measures to put our economy on the right path.”
