Stronger Yen and Weaker Pound are the major movers this week.

The Japanese Yen proved to be the golden boy of the week. Risk aversion on the back of weaker US statistics namely Jobless claims, Manufacturing orders and Cosumer confidence led the Yen 3% stronger against the dollar and 4 1/2 % against Sterling.
The Euro was largely unchanged against the US dollar and may still be supported by the weight of short positions.

The situation in Greece remains the focus of attention and some further announcements of additional budget cuts could be announced as early as today.There has been rumors that following satisfactory action from the Greeks that the Germans will support their bond market possibly through the state-owned bank KfW group and other similar institutions in Europe.
There seems a good possibility that this may happen probably leading to a Euro bounce against the Dollar.The ECB would love to see a short squeeze on currency and bond speculators.
That said if the Greek population refuse to accept further austerity measures it still offers the possibility they will be hung out to dry.

I still favor seeing the 1.40 level before a test of the 1.30 level and lower. However, I also remain convinced that at some point the will be a sell off in Equities(and subsequent dollar and Yen strength) which thus far seem to have ignored the recent softer data.There seems to be two wildly different camps on the view for economic recovery or slide back into recession.
Sterling has once again found itself in the firing line. It is no coincidence that this has followed the improved position of the Labour party ( Today just 2 points behind the Conservatives in the Sunday Times poll).The market perceives that the Labour Party would be softer on addressing the UKs huge deficit and they are right. Sterling collapsed against the stronger Yen ( closing at 135.50 as against 141.5) but crucially to 89.50 against the Euro.

Undoubtedly there could be another Sterling crisis on the horizon as I have already alluded to. At the very least we may well se a test of the lows against the Euro (96 level) and talk of a break through parity in the months ahead. I fear that the UK could be IMF bound on a worst case scenario next year on the back of a Labour(Gordon Brown ) victory.

So the week ahead could again be dominated by Greece,possibly,a Euro dollar bounce? …………mind the gap.

GBP then EURO rallies come to an abrupt end

Just as the Pound and Euro were fighting back came a mass of bad news to end the brief rallies.
First Sterling which was sold off on BOE Governor King’s dovish comments. Then The German IFO business climate figures and French retail sales which were very disappointing(Weather and the end of car scrappage schemes were blamed).
Just to add to the misery and aid the dollar and Yen even more was the announcement  of US conference board  Consumer Confidence figures, which fell to a 10 month low of 46 against 55 expected.
This led equity markets lower compounding the the Yen and dollar rise.

So where to next?
Well frankly it is difficult to see much to help out the Euro other than it being oversold. There seems to be a real danger of European  countries slipping back into that talked about double dip recession. The difference this time will be that governments are unable to pump more cash in this time. On the contrary many will be having to do the opposite.

I am perfectly prepared to be wrong but a  sell off in equities and  at some point a blood bath in the Bond markets ( triggered by Government debt)  looks to be looming.
Now the US and Japanese have their own problems but the initial moves for both their currencies could be much  stronger.
If this pans out then Gary Shilling´s prediction of parity for Euro Dollar does not look that far fetched
Just to add to the mix the Forex Market hero George Soros believes that the Greek problem is the least of the debt worries for the Euro zone .

If there is any Euro rally on the back of some sort of Greek bail out ,or short term consolidation, it could well be a  precursor to another big down move for Euro dollar.

Playing the short term rally certainly ended in tears today.

Weekly Review- Dollar fails to push on

Forex Update

The surprise of the week was the Federal Reserves decision to raise the discount rate by 25 basis points to .75 %. This was of not a signal of Fed tightening but merely targeting the supply of reserves.
After an initial Knee Jerk stronger the dollar ended the week close to where it began. However, it may reinforce the growing view that the US is further advanced on the recovery road and thus the Fed will be the first to exit from stimulus measures.Markets are predicting some tightening by the Fed in the Autumn but some commentators are now predicting this may be earlier. The yen suffered particularly losing ground not only against the commodity currencies but also the Euro.

The long dollar and short Euro positions held by the currency markets seem to be stalling any further moves at the moment. A more corrective phase may ensue and perhaps some dollar bulls and euro bears will have to be squeezed out of positions before we see an assault on the lower 1.30s. It is quite possible we will see the Euro back at 1.40 against the dollar and nearer 130 against Yen before any further weakness.

The situation in Greece seems to have slipped to the back burner and may add to that corrective phase. However, this problem together with the other PIGS will run and run. Greece has major problems persuading its public to accept the budget cuts required. Although 70 % of the public appear to back the government many different factions appear not to want to bear their share. Ireland which is now held up as some example of facing up to its responsibilities, has a long long way to go.In general the Euro area growth will remain very sluggish merely exacerbating the deficit problems.If governments are forced to turn off the stimulus taps then we could see some real anxiety and likely the beginnings of even greater social unrest in some countries.

The UK statistics were all very disappointing. A first January deficit for PSBR (-GBP 4.3 Billion as apposed to expected -2.4 billion). Retail sales dropped 1.2 % in January and the CPI hit a whopping 3.5 %.
Sterling has not benefited from any of the recent Euro weakness. While the rating agencies are engaging in a wait and see what the election brings approach,the outlook for the pound remains vulnerable.
Indeed it is not difficult to envisage a scenario further ahead of another crisis for the pound.
Talk of tough action on the deficit is not good Electioneering and Gordon Brown in particular seems convinced that he can go on spending until the UK grows out of its problems.As I mentioned last week the mumblings of a possible hung parliament are growing. That leads to uncertainty as the UK has never faced that before and that could well add to the pounds woes.

The key for the coming weeks may well be the performance of the stock markets. A little spooked by the Fed the US markets are still hanging on to some big physiological levels. If we were to see further weakness in the Dow and S&P under the 10,000 and 1000 levels then things could get nasty and the dollar and yen could swing back into favour.However , as I mentioned in the short term it maybe these 2 currencies which suffer from a Euro pullback in the foreign exchange markets.

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GREECE UPDATE

GREEK UPDATE . Will they get a spoonful of sugar to help the medicine go down

The European Finance Ministers may have bought a little time and have asked the Greek government to report back to them on 16th March, without giving the market much in the way of information at all. They have requested that the Greeks come up with further details for more cuts.

Frankly it is all a bit sort of naughty schoolboy stuff and almost humiliating the Greeks into action. For sure though, there does not seem to be any appetite for bailing them out at this stage.
The problems may be that the Greek public be they farmers, students, civil servants or whatever may just not be prepared to tolerate the pain ( and humiliation). Of course the alternative if they understand it is just as bad i.e the IMF.

Watch for the reaction in Greece but right now the government seem to be caught between a rock and a hard place.
As I stated before they should never have got into the club and they all know as much.The Euro members are going to play it tough because if they do not then they know the consequences for credibility.So watch and if the Greeks will not take the medicine they are out.

Is this the beginning of the end for Euro zone.

The week was dominated by Greece and although off the lows the market voted with their feet as far as the Euro was concerned.
Interestingly there are some very distinguished economic commentators predicting the demise of the Euro zone. Their argument is pretty compelling to anyone who has always had their doubts about the Euro zone believing as I do that it is fundamentally floored.
The authorities are papering over the cracks and it appears that while they may buy some time the likelihood of Greece and others ( Portugal Spain and Ireland) being able to make creditable reductions in budget deficits over the coming years looks remote.
The real. truth is they should never have joined and in the case of the Greeks they should not have been allowed to.
Against a background of what looks likely to be pretty benign growth in Europe will these countries be prepared to embark on a long period of austerity.
Bailing out the banks was one thing but Sovereign problems is another ball game. Investors are right to be concerned .
As far as the currency market goes next week will probably be wait and see. While Euro dollar may test the low 1.34 level there could well be more consolidation ,as the market digests the information coming from the finance ministers meeting.
Much has been written about the excessive short Euro dollar position held by the IMM IInternational Money Market)- equivalent 5 Billion GBP.While this may spell warnings of a correction it will be of little consequence if there is a major reallocation of assets away from the Euro If the the big movers and shakers get their teeth into this then frankly we aint seen nothing yet.While any argument for a major move into dollars and to a degree Yen is not very compelling at all ,they may win by default.
The possibility of German and French tax payers footing any bailout bill may be tempting for the generation of politicians that have committed to the Euro but would cause rebellion from the public. Indeed a television poll in Germany showed 71% of German voters are against providing financial help for Greece and political pressure would likely refrain German prime minister Merkel from taking any further steps.

The lack of any real concrete measures this week showed that there is no consensus and certainly those outside the Euro zone but within the EEC will give a thumbs down to any financial assistance from their taxpayers.
Of course whatever is cobbled together may buy some time but that will be all.The jury will be out for some time ,however,this is looking more and more like the beginnings of a major sovereign debt crisis.

Weekly review

BUY DOLLARS AND WEAR DIAMONDS

The Euro finished the week substantially lower against US Dollar on sharp declines in World Stock Markets together with continuing concerns over Greece and other Euro zone countries notably Portugal and Spain..Despite rallying calls following measures announced by Greece the markets remain to be convinced.The euro fell below $1.36 and dropped against currencies such as the Swiss franc, forcing the Swiss National Bank (SNB) to take the unusual step of intervening in the market.

German Industrial production unexpectedly fell 2.6%m/m (consensus +0.6%), adding to woes for the euro area. Previous momentum in growth seems to have waned, suggesting that the stimulus-induced improvement has faltered.

With many equity markets hovering near technical support levels the next weeks might indeed add to the risk aversion argument helping the dollar and Japanese Yen further.

Finance ministers have committed to continue stimulus policies but this does not add up when balanced with the need for controlling and reducing the huge budget deficits.All in all a delicate balancing act with recent equity moves perhaps indicating that markets had got ahead of themselves.

Non Farm payroll figures did little to stem the tide with the markets seemingly wedded to the stronger dollar and yen view for the time being.Technical trends remain downward for the Euro dollar although very oversold making consolidation or bounce a distinct possibility this week. The situation with the Greek problem will be watched closely and if speculators continue to have the upper hand then the Euro will undoubtedly suffer.

Sterling also suffered against the dollar and is now testing some big technical levels but was largely sidelined- The outlook for the UK and the pound, however remains vulnerable and talk of hung Parliaments will do little to help.

Monday Update

The euro is rebounding slightly while the pound suffered in Europe on Monday.

Generally the dollar is higher, helped by last Friday’s stronger-than-expected gross domestic product figures from the U.S. as well as some anticipation of more strong data later this week.

The Euro took center stage as a technical rebound helped it to bounce early in the day despite continued concerns about Greece’s debt problems.

The latest data from the Chicago Mercantile Exchange showed that speculative euro shorts have risen back close to the all time record on September 2008. ( NB Worth noting that this was close to the bottom for Euro Dollar which susequently rose nearly 20% by the end of the year)

The Euro also got an additional lift from the latest euro zone purchasing managers’ index, which rose to 52.4 from 51.6. The market had only been looking for a rise to 52.0.

However, market participants doubt that the euro’s new-found strength will last long, given that Greece’s debt problems are not about to go away and given that economic data continues to point to a more robust recovery in the U.S.

Overall, market sentiment was helped by the surprisingly strong fourth-quarter GDP data showing that the economy grew by 5.7% and not just by 4.8% as expected.

The market is now looking for a healthy rise in the latest Institute of Supply Management surveys later this week as well as non-farm payrolls Friday, which could show an increase.

Meanwhile, in the U.K., the latest manufacturing PMI rose to 56.7 in January from 54.6 in December. The consensus forecast was for a fall to 54.0.

However, the news failed to give any help to the pound, which had been falling from early in the day following weekend press reports suggesting the Bank of England’s monetary policy committee is split.

This suggests that is a chance that the central bank extends its quantitative easing program when it meets later this week because of a lack of confidence in the recovery.

By mid morning, the dollar had risen to Y90.34 from Y90.29 late on Friday in New York, according to EBS.

The euro was up at $1.3909 from $1.3866 and at Y125.66 from Y125.22.

The dollar was also down at CHF1.0581 from $1.0606 while the pound was down at $1.5905 from $1.6004.

The Swiss franc gave back some of the losses it suffered against the euro in New York Friday, after reported intervention by the Swiss National Bank when the Euro fell under CHF1.4650.

With the possibility of further weakness in equities which seem to have been side-stepping any good news this could well point to further weakness for the Euro and US Dollar strength.

Short term may see a bounce for the Euro but it could become vulnerable with moves below good technical support in the mid 1.37s . If this was to coincide with further Equity weakness and heightened tension over some Euro deficits then a much bigger move below 1.30 could follow.