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 28 February 2010
UK Recovery Slowing
Greece’s debt crisis has taken center stage for months and has dominated currency and financial market news. Many economists believe that the integrity of the multi nation currency is threatened by debt problems in Greece, Italy, Portugal and Spain. One former International Monetary Fund economist believes several defaults will take place this year in the euro zone. The euro zone is not the only economy facing slow and painful recovery. Last week the British pound fell against most major currencies on investor concerns that the UK economic recovery is faltering and the nation may have to struggle to deal with rising debt. The pound is on track for its biggest monthly decline against the US dollar since October 2008. A recent report showed that UK government spending grew 1.2% in the fourth quarter well above predictions of 0.2%. GDP reports showed that the UK economy shrank by an astounding 6.2% since the first quarter of 2008. Stephen Gallo of Schneider Foreign Exchange in London stated, “The market is going to be concerned about the state of public finances in the U.K. The risks are already high of a double-dip recession.”
UK Faces Serious Debt Crisis
On February 26th the pound fell 1% to 89.62 per euro and against the dollar the pound fell 0.7% trading at $1.5153, the lowest since May 2009. Prime Minister Gordon Brown is under intense political pressure to show that he can deal with the UK’s record deficits. The UK budget shortfall is now more than 12% of the nation’s GDP putting the UK on a par with Greece. Recent data shows that the UK’s recovery from the global recession is faltering. House prices fell for the first time in ten months and Bank of England Governor Mervyn King said that the central bank is prepared to do “whatever seems appropriate” to stimulate and preserve growth. Richard McGuire of RBC Capital Markets warned, “A severe consolidation of government finances is both imminent and unavoidable.”
Bad News For the Euro
Several economists are warning of further declines for the already troubled euro. Adam Boyton, a senior foreign-exchange strategist at Deutsche Bank in New York wrote in a client note on February 25th that the euro could fall as much as 6% vs. the US dollar “over coming months” on speculation that the US Federal Reserve will raise rates before the European Central Bank. Boyton wrote, “Looking at past price action would suggest a lower bound for euro-dollar over coming months of $1.2750 to $1.3000. Ahead of that, the next leg down in euro-dollar is more likely to come from pricing a Fed rate-hike cycle than a further re-pricing of fiscal risk in the euro zone.”
Posted on 26 February 2010
Greek Austerity Measures Cause Strikes, Unrest
The first decade of the multi nation currency the euro was marked by relative economic stability allowing most EU member states to enjoy low interest rates making the EU economy competitive. The recent Greek deficit crisis is now threatening the stability of the euro zone and its currency. Austerity moves by the Athens government of Prime Minister George Papandreou have caused widespread social unrest in the country. Communist protestors tried to blockade the Greek stock exchange and strikers attempted to shut down air, rail and shipping networks to protest cuts in pension and welfare benefits. Bank of England Governor Mervyn King expressed concerns that Europe’s economic recovery has “stalled.” Delegations from the IMF and the EU arrived in Athens to begin talks with the Greek government on how to rein in excessive spending.
Greece Faces Further Downgrades
The Greek fiscal crisis has rippled through currency markets prompting a flight to safe haven assets and currencies. The Japanese Yen is now at a one year high vs. the euro as threats of a further Greek downgrade sent investors away from riskier assets. Standard & Poor’s and Moody’s Investors Service said that the Athens government faces a further downgrade as early as March. Omer Esiner of Travelex Global Business Payments stated, “There’s a rush to cover short positions in yen when there’s a spike in economic uncertainty. “Sovereign credit concerns are keeping the markets in check. Higher- yielders are trading sharply lower.” The yen gained 1.1% vs. the euro trading at 120.66 per euro while the US dollar traded at $1.3550 per euro. The euro has fallen 2.3% against the dollar in February. About the euro negative sentiment in currency markets Brian Kim of UBS AG stated, “Euro sentiment was weighing lower in the morning, but when you see disappointing data come out, it starts to bring up some questions and you get a bit of a pullback in the dollar. The dollar’s gained so much versus the euro that to get a strong move down up versus the euro we’ll need to see economic better data.”
Greek Crisis Threatens Euro Zone Stability
The head of Germany’s debt agency Carl Heinz Daube warned that a bankruptcy of an EU nation or a nations exit from the European Union would mean the end of the European Monetary Union. In a statement in London Daube warned, “If one member were to go bankrupt this would mean, after 10 years, the euro experiment is at its end.” Most economists expect the EU to eventually come to the aid of Greece especially if a default threatens the integrity of the multi nation currency.
Posted on 24 February 2010
Opposition to Aid Fierce in Germany and the Netherlands
The ongoing Greek debt saga continues to be closely watched by currency traders and investors. The drama has prompted a lot of speculation about the fate of the European Union and its multi national currency the euro. A recent meeting of EU finance ministers failed to offer any concrete solutions to the Greek crisis. The ministers told Greece to be ready to implement even more austerity measures by the next meeting of EU finance ministers on March 16th. Opposition to aid is fierce in some quarters most notable Germany and the Netherlands. Although German Chancellor Angela Merkel has made blunt public statements opposing aid to Greece Merkel’s coalition government has admitted privately that contingency plans are in place should Greece be unable to service its sovereign debt.
Greek Aid Could Pose Legal Problems For EU
One German economics professor who also opposes the euro has threatened to take legal action if Germany and other EU nations provide aid to Greece. Article 125 of the EU treaty states that the EU and member nations “shall not be liable for or assume the commitments of central governments … without prejudice to mutual financial guarantees for the joint execution of a specific project.” Article 122 of the same treaty states that, “where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. Andrew Scott a member of Edinburgh University’s law faculty and an EU legal expert said, “The no-bailout clause does not stop the German government using taxpayers’ money to buy up Greek debt. But if you bail out Greece from within, the markets will never take seriously a risk premium for a debt-ridden member state again.” The EU faces a very serious dilemma.
Support For Aid
Many analysts familiar with Greece’s problem believe a bailout by the International Monetary Fund is the best solution. The European Investment Bank and the European Bank for Reconstruction and Development have also been cited as possible sources of aid for Greece. Despite popular opposition to aid for Greece in Germany most experts believe that if the integrity of the euro is threatened Germany would most likely act to save Greece and the euro. German Finance Minister Wolfgang Schaeuble favors aid to Greece if absolutely necessary. Any assistance for Greece is likely to include demands for additional and painful austerity measures on the part of the Athens government. In a statement Merkel stated, “The mistakes have to be dealt with at their roots. In the case of Greece, we need to do everything to support the Greek government, which of course has taken this path, in formulating a true consolidation program.” The Greek saga sounds like one big political and financial mess.
Posted on 22 February 2010
New Forex Rules Could Damage Forex Industry
The US Commodity Futures Trading Commission (CFTC) has proposed some very restrictive rules that could adversely affect the thriving forex market. Thousands of traders have flocked to retail forex markets in search of profits greater than those offered by stocks and commodities. Although most of the new rules proposed by the CFTC are meant to reduce investor exposure to scams many forex brokers say the rules go too far and could damage the thriving forex market. Many brokers say that the rules may force them to cut back on US operations sending billions in trades abroad. They also point out that thousands of jobs may be lost due to the restrictive rules. Joseph Trevisani of FX Solutions based in New Jersey stated, “It’s a real issue here — we are talking of losses in jobs, tax revenues and competitiveness.”
Limits on Leverage
What worries traders most are the new rules that would limit the amount of leverage traders could use. Currently leverages of 100:1 are common and the CFTC has proposed limiting leverage to 10:1. Should the new leverage rules be imposed traders would have to invest larger amounts to make trades of the same size limiting both profits and losses. Brokers are adamantly opposed to the new leverage rules. Trevisani at FX Solutions said, “Efforts to promote transparency and prevent fraud are more than welcome, but I can’t really see the connection between fraud and customers’ leverage.” One of the most attractive features of forex trading is the large amount of leverage available to investors. Although a 10:1 margin is much larger than the 2:1 average leverage for stocks a reduction in leverage allowed will send many investors overseas where larger amounts of leverage are allowed. Currently the UK allows leverage of as much as 500:1. Most brokers say that the new leverage rules are out of step with international industry averages.
The Industry Fights Back
A group of currency dealers have formed a Foreign Exchange Dealers Coalition (FEDC) to fight the proposed rules. In a letter the group said that the new hedging rules would be a “crippling blow” to the thriving forex industry. The letter also stated, “Should the 10 to 1 leverage rule be adopted the vast majority of those accounts can be expected to go offshore.” They say the new rules would force investors to go offshore in search looser leverage rules. They also point out that investors who are forced to go offshore will be at the mercy of dealers with no capital requirements or regulations designed to protect investors. The FEDC stated, “These unregulated forex dealers don’t have to worry about capital requirements, risk management models, marketing ethics, dealing practices or even returning a customer’s funds.” Hopefully the FEDC will be heard in Washington and leave the leverage rules alone.
Posted on 17 February 2010
Better Than Expected US Data
The US dollar hit a two week high on February 17th as better than expected housing and industrial output data pushed the greenback higher in currency markets. The euro remains pressured by the fiscal problems in Greece, Portugal and Spain. Jessica Hoversen of MF Global Ltd., in Chicago stated, “When it comes to economic fundamentals, the U.S. is ahead of most other regions. If you combine that with the fact that the situation in Greece is still very far from being reconciled, what you get is support for the dollar.” On Tuesday European finance ministers gave Greece one month to show that the nation’s deficit reducing measures are being implemented. Greek fiscal problems have pressured the euro since late last year and currency traders raised euro short positions to a record high last week.
FOMC Minutes Due
Investors are waiting for the release of January’s FOMC meeting and will be searching for any sign of the Fed’s exit strategies. Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank should get rid of some of the assets the Fed bought to stabilize the economy. Kathy Lien, of GFT stated, “When you have one FOMC member voting in favor of more hawkish language in the monetary policy statement, additional members are likely to follow suit and traders will be looking to see if this sentiment is reflected in the minutes. If the minutes reveal optimism, it could fuel further gains in the dollar.”
EU Ministers Offer No Solution to Greek Fiscal Crisis
German opposition to any kind of aid to Greece remains fierce. A recent poll showed that a majority of Germans are opposed to aid to Greece and a recent Dutch poll revealed similar sentiments. Germany’s Chancellor Angela Merkel stated that “not a single euro” should be used for aid to Greece. European finance ministers said after a two day meeting that they want assurances that Greece will be able to cut spending before they make any decision on aid. The finance ministers did not offer specifics on the Greek issue much to the chagrin of traders and investors. Michael Hart of Citigroup stated, “European leaders are missing an opportunity to clarify their stance vis-à-vis Greece and to provide markets with an explicit roadmap. The relief rally in euro-dollar could be short-lived.” On Tuesday the euro gained as much as 1.3% after Greek Prime Minister George Papaconstantinou said that his government does not need a bailout. European finance ministers will meet in early March to determine what actions need to be taken in regard to Greece.
Posted on 09 February 2010
EU Summit on Thursday
The euro gained slightly against the US dollar but remained near an eight month low pressured by concerns about the fiscal health of some EU nations. Persistent worries about Greece’s debt crisis have pressured the euro in currency markets. Investors are waiting for the results of a special European Union summit on Thursday. Many investors are concerned that the EU summit will not address the ongoing Greek crisis. After EU President Herman Van Rompuy said that the summit will focus on long term economic strategy for the EU the euro fell to an 11 month low against the yen. Van Rompuy made no direct references to Greece in his statements. Masahide Tanaka of Mizuho Trust & Banking Co. stated, “Investors won’t be willing to take the risk to buy higher-yielding currencies unless organizations such as the European Central Bank and EU speak up to rescue Greece. If investors switch their attention to the fragility of Europe’s economy, euro weakness may accelerate.”
European Governments to Help Greece German Source Says
Greek Finance Minister George Papaconstantinou told Bloomberg television, “We are trying to implement a very difficult stability and growth program to which we are fully committed. The worst possible signal which we could be sending out is one calling for outside help.” A German source said that European governments have agreed to help Greece address its debt crisis. The unnamed source stated, “The decision on help for Greece has been taken in principle within the euro zone.” The comments prompted speculation that Germany may be preparing to step in to boost confidence in the EU and the euro. Outgoing EU Monetary Affairs Commissioner Joaquin Almunia urged EU leaders to help Greece in exchange for severe reforms. Almunia told the European Parliament, “I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us. You don’t get support for free. That would simply lay the foundations for further imbalances and crisis. We have got instruments to provide that in exchange for clear commitments that they will meet their responsibilities.”
Fitch Ratings Warns Greece
Greece, Portugal and Spain are under pressure to address massive budget deficits which have been aggravated by the ongoing recession and billions in stimulus spending. Fitch Ratings warned that markets may not wait very long for Greece to address the sustainability of the nation’s finances. Fitch analyst Chris Price said, “They need to address those concerns now because ultimately the market won’t wait until it becomes blatantly obvious that the situation is unsustainable.” To add to Greece’s troubles Greek public sector workers say they will stage a one day strike on Wednesday. In Portugal the nation’s public administration workers union plan a one day strike on March 4th to protest a wage freeze. Some sources say austerity measures could prompt social unrest in Greece, Portugal and Spain.
Posted on 16 January 2010
Dollar Boosted by US Data
The US dollar gained against most major currencies on Friday boosted by US reports showing increased manufacturing and stable consumer price inflation. The troubled euro fell 0.9% against the dollar as ongoing Greek fiscal problems weigh on the euro. Despite recent dollar gains some currency experts expect the dollar to remain weak during 2010. Many expect investors to dump dollar denominated assets in favor of higher yielding securities and currencies. David Bloom of HSBC Holdings Plc stated, “A dollar recovery would require overseas investors to be enthusiastic buyers of U.S. assets. Given the domestic financial imbalances, this seems unlikely, and we expect the dollar to remain weak throughout 2010.” In addition Bloom and his team said that the dollar will remain a favored currency for carry trades. Bloom said, to the extent that carry trades are back in fashion, it may well be the dollar that is the preferred funding currency given its low rates, high liquidity, and continuing current account deficit.” The reluctance of the Federal Reserve to raise rates has negatively affected the dollar and the Fed has said that rates are likely to remain at record lows for an ‘extended period.’
China Tightens Policies
Recent policy changes by The People’s Bank of China have sent ripples through global markets. The central bank said it would increase the proportion of deposits that China’s lenders must set aside for reserves in an effort to rein in growth. The move pressured commodity linked currencies such as the Aussie and kiwi dollars. Lowered commodity prices and reduced demand have pressured both currencies. Australia is a chief supplier of raw materials to China. Yoshihiro Nomura of Trust & Custody Services Bank Ltd said, “China is beginning to show signs of tightening, which should lead to risk aversion. Investors are sensitive to China’s news. I wouldn’t be surprised if the euro-yen were to drop further.”
US Markets Closed Monday
US markets will be closed Monday in observance of Martin Luther King Day but several reports are due later in the week from the US. Data to be released this week includes U.S. net capital flows, producer prices, housing starts, and initial jobless claims.
Posted on 15 January 2010
Disappointing US Retail Sales Data
The US dollar fell close to a three week low as US retail sales data showed an unexpected decline in December normally the busiest retail sales season of the year. A separate U.S. Labor Department showed that jobless claims rose during the week that ended January 9th. New unemployment claims jumped to a total of 444,000, 11,000 more than the previous week. The dollar extended losses after the Fed’s beige book report that showed modest economic improvement.
Rising Commodity Prices Prompt Loonie Gains
The Canadian dollar rose against its US counterpart as investors speculated that rising commodity prices will spur recovery in Canada. The Canadian dollar advanced 3.5% last month and is on track for parity with the US dollar for the first time since 1976. Commodity linked currencies are expected to gain as rising demand for raw materials will increase due to recovery. US growth is expected to raise demand for Canadian oil and natural gas. The Aussie dollar rose against all of its major competitors today as Australia’s statistics bureau said that the country added 35,200 jobs in December and that the Australian Reserve Bank may raise its rates by a quarter of a percentage point. Jane Foley of Forex.com stated, “The strength of the Australian dollar is again lending support to the Canadian dollar and the New Zealand dollar.”
Trichet’s and Merkel’s Remarks
The euro declined against the greenback after European Central Bank President Jean Claude Trichet said that the outlook for the euro zone region is ‘uncertain’ and added that “Greece fiscal problems won’t get any special treatment.” Germany’s Chancellor Angela Merkel said that Greece’s fiscal problems would lead to a “very difficult phase” for the 16 nation currency. Greek Prime Minister George Papandreou’s government has a plan to push the country’s deficit below the EU’s budget limit in 2012. Referring to Greece, Trichet said, “no government, no state can expect special treatment.” Greek fiscal problems will likely plague the euro for some time to come.
Posted on 13 January 2010
Fed’s Beige Book to be Released
The US dollar fell against 12 of the 16 most traded currencies in advance of the release of the Federal Reserve’s ‘beige book’ which is a summary of regional economic conditions. Many investors see last week’s weak US employment figures as pointing to a prolonged US recovery. Andrew Wilkinson of Interactive Brokers Group stated, “The lackluster momentum for the U.S. recovery has resumed and that seems to be undermining the dollar right now.” The Fed will release the beige book today and the report is used as a basis of discussions at FOMC meetings. Joseph Trevisani of FX Solutions Inc. pointed out the importance of the beige book report and said, “Past Beige Books have said the same thing, that things are slowly getting better, but today’s is probably going to be toned down. The market is really looking for something that will change the current complexion of things, and the Fed has been making some noise about pulling liquidity.”
Pound Gains on BOE Statements
The pound gained 0.7% against the greenback trading at $1.6282. The pound also gained against the euro and yen. The pound was lifted after Bank of England policymaker Andrew Sentence told the Guardian newspaper that the BOE may adopt a ‘wait and see’ approach to it’s program of quantitative-easing. The pound was also bolstered by better than expected UK industrial production data. Adam Cole of the Royal Bank of Canada stated, “The comments from Sentance gave a sniff of a turn in the U.K. rate cycle, and that lifted the pound. It’s a bit premature in our view, but the comments moved the markets.”
Yen Falls Broadly
The Japanese yen fell broadly as stocks rose. Currency experts now say the yen is the currency of choice for carry trades. David Deddouche of Societe Generale SA in Paris said, “The yen is clearly now the funding choice for the carry trades. As long as we stay in the sweet spot for equities, the yen has weakening bias.” On Thursday the US weekly employment figures and retail sales figures are due to be released.
