Weekly review….. Euro fight back but jury out on next move as Greek talks stall

It seems the forex market is in a battle ground as far as EUR/USD goes. It is challenging the upper end of its recent channel but could not really manage a decisive break or close above the EUR/USD 1.2950 level. The price action since lasts weeks Standard & Poor’s downgrades has been Euro positive. Euro zone bond markets have been holding up well ( ECB money channelled through the banks mind you), equities have enjoyed a solid start to the New Year and US data at least continues to be supportive for risk.
As I said Friday EUR/USD bears may be tested further if we break higher, up near 1.3300 cannot be ruled out but I would be looking to sell there up to 100%, all in as you might say. There seems to have been good 2 way business from sovereigns but undoubtedly some profit taking from shorts,many of whom will have good profits.
One of the game changers last week was the new IMF initiative to raise more funds. It remains to be seen if the United States back it. There response so far has been pretty cool. Indeed the IMF is courting controversy. Ms Lagarde the French head of the IMF cannot in anyway be seen as a neutral in this. Having been a French minister she seems to be running a crusade to save the Euro, hardly what the IMF mandate is about. She has all the hallmarks of someone who will go on to stand in a French presidential election, presuming she does not self destruct like here predecessor. In any event its all a bit to Europe orientated. Their stance over Greece looks very strange, admitting things are ´dia´ with no real structural reforms and the downward spiral continuing but apparently happy to splash the cash still.
The Monti government in Italy will be unveiling its plans for structural reforms in the Labour market, which is finally to be applauded. The crucial points here are the response of unions. No Italian prime minister has been able to take them on but maybe this time it will be different baring in mind the economic situation. Of course the fruit from any changes will be years away, while the pain is immediate. Unions will want something on the growth side if they agree and its difficult to see what that might be.
Mr Sarkozy must be mighty relieved that the French downgrade has caused no wobble in bond markets and he too is talking of some major labour market reforms as he consults the unions. Brave man ahead of the election maybe, but perhaps it will be a master stroke. For sure the socialists might not look credible if they appose them much as in the UK where the Labour party have been forced to change tack on fiscal policy because of their policies lacked credibility.
So it may be that Euro bears will have to wait.The reality check for sure will be economic data from southern Mediterranean countries. As much as any individual can gauge anything the signs here in Spain point to some very poor economic figures. Starting from unemployment levels of 23% as they go into recession must be unheard of in this day and age

On to Greece where market participants will have been expecting an agreement on its debt swap deal this weekend.Latest reports suggest that representatives from private creditors have taken a time out and that the talks will not resume for a few days. While this may not be anything more sinister than last minute fine tuning of the interest paid and a deal will happen next week it could unsettle markets on Monday.

In currency markets one indicator seems still to be Euro bearish. The EUR/CHF has stayed unmoved under 1.2100 close to the 1.2000 peg and certainly no talk of raising it at the moment. It points to a continuing flow of funds away from European countries into the safety of Switzerland . Portugal which reached its 2012 targets not least by taking funds from its pension pot is thought to be next for a rescheduling quite possible followed by Ireland. And by the way just 2 weeks ago the Irish pm was on TV stating Ireland would not accept a financial transaction tax if the UK was not going too. Just another reason for them to clash with the French.

All this goes to show that despite completing austerity packages rubber stamped by everyone the upshot is failure.If more is prescribed how long before the stoic citizens cry enough. Ratings agency Fitch this week pronounced that a solution to Europe’s problems was technically and politically beyond reach, a conclusion it made after the December summit. That remains the key and as we have seen over the last 2 years the Euro zone problems may seem to come and go but in reality they are not being solved because it is 10 years too late. That the eurozone may be fixed in the next 10 years is going to be too long to wait.

Headlines

• Greece.Latest (Sunday) news points to suspension of talks without agreement. May unsettle markets on Monday but will happen next week.
• EUR/USD remains at crucial level 1.2945 at the top of its recent downtrend channel.
• European banks continue to support their domestic bond markets. All smoke and mirrors but ECB money is finding its way to fund governments
• Italian leader Monti to unveil the first real labour reforms. How will Italian unions react
• US housing data improves ( inventories of unsold homes falls to lowest since 2005)
• US Republican nomination just got interesting.Newt Gingrich wins South Carolina making it a 2 rather than 1 horse race

By the way how is your Iranian riyal position. Since October the US$/RIYAL has fallen to 18,000 from 10,500 . No change in the trend on that one either

Friday update….. PLEASE JOIN OUR CAMPAIGN

Details at the bottom of the page

Bonds and Equities edge higher. Its all plane sailing

The Euro pushed on and the US currency fell again as suddenly forex markets were filled with the joys of spring. Spain and France sold bonds and the Japanese Yen finally took a beating on the crosses as it finished the weakest currency on the day. Pity those poor USD/JPY traders who may have been asleep for 3 months.
Indeed EUR/USD tested its limits on the daily chart ( reaching 1.2947), at the top side of a trend we have seen since early November.We would need a bigger high on a close to confirm that and the brave might want to sell here. What it does do is signal that on any further squeeze a potential 300 plus points higher could still emerge.I would say at that point I would be tempted to go all in short.
It seems as so often is the case that the very thing hanging over forex markets i.e. the downgrades were indeed the classic sell the rumour buy the fact. Even Greece is presumed to be off the hook, although I wouldn’t believe that until its well and truly confirmed. With economic data though still continuing to support the stock rally the feel good factor seems to have taken hold on the Euro. A very premature move but capable maybe of testing bears to the brink and most likely taking many shorts out on the way.

Headlines

• Greece inches towards agreement with bond holders
• Euro recovers ground but EUR/CHF remains close to 1.20 peg EUR/USD fails to break 1.30
• Russia indicates willingness to contribute to IMF but hints at strings
• China PMI unchanged at 48.8 still in contraction territory
• Equities continue to inch higher globally

News from Moscow was good news and bad news for the Euro zone. Russia agreed that they should make a contribution to the IMF together with other emerging nations.However, they added that they would need to participate in formulating a rescue plan to troubled countries. Great news for peripheral strugglers. As if being overseen and under orders from Brussels wasn’t bad enough, now it will be austerity Russian style. Maybe they could supply some bad weather to complete the misery.
I think Moscow is somewhat revelling in this and who can blame them. They deserve to rub it in. The IMF bailout of Euro zone countries is a disgrace for all concerned. Citizens of receiving nations where the rich and greedy have failed to pay taxes and when massive savings are stashed away should be ashamed of themselves. That ,however, would require some semblance of a conscience.

JOIN THE CAMPAIGN : NO IMF OR EU BAILOUTS : LET THESE COUNTRIES FUND THEMSELVES FROM DOMESTIC PENSION FUNDS, ALL THOSE RICH AND GREEDY WHO PAY DERISORY TAXES ,HAVE SOME PRIDE AND A BIT OF CONSCIENCE.

Thursday update …Euro lifted on IMF fund raising plans

News that the IMF plan to raise $600 Billion gave the Euro a lift off the lows yesterday taking it up to a high of EUR/USD 1.2880. It is intended to lift the fire power to $ 1 trillion and markets liked it. It seems the Likes of China Brazil India and Oil producing countries will be asked to step up to the plate. However, it remains to be seen with the US apparently not prepared to contribute as they rightly feel that Europe has enough resources to manage on its own. Euro zone bond markets continue to perform a smidge better so all in all the Euro short squeeze could continue.
Greece will edge into the spotlight as negotiations continue. Success seems likely despite the consensus view that it will not be enough and the whole circus will have to start again some time in the future when Greece fails to make progress.
EUR/USD 1.30 seems more likely than not but I still wouldn’t want to get caught long.

Headlines

• IMF targets raising of $600 Billon
• Monti forecasts 5% budget surplus for 2013, provided rates fall. In your dreams Monti
• Greece threatens bond holdouts with new laws. Change the rules if its not going your way
• European banks continue to support local bond markets while ECB still seen buying
• EUR/USD sees good two way orders

Wednesday update..Its all rosy again…………as long as Greece holds on

As equity and peripheral bond markets continued to hold up the Euro edged up and the US dollar slipped a little. EUR/USD stuck its head over 1.2800 briefly this morning but trades back at 1.27400 on news that ratings agency Fitch is pondering a 2 notch downgrade for Italy. As we have said the recent ratings cuts by Moody’s hold more implication for Italy and Spain than France.Later today or tomorrow the discussions on Greek debt will resume. While some are pointing the finger at hedge funds it seems the banks also may not back down. I would expect Greece to buckle and agree higher rates. When you are desperate for cash you sign up for anything but of course it will not be sustainable. These talks remain crucial to markets and I am edging towards expecting an agreement which could see the Euro higher short term.
Longer term there seems nothing on the horizon to change a bearish view

Headlines.

• ECB continues to support Italian and Spanish bonds. The ECB is quietly lending support to these markets in an attempt to edge yields lower but without excessive buying
• World Bank slashes world growth forecast. Outlook grim. The world Bank lowered growth estimates to 2.5% for 2012 from 3.6% and sees a real risk that escalation of the euro zone crisis could plunge global economies into a slump.
• Moody’s upgrades Indonesia to Investment grade. Now which part of the world are they

Greece will fail because the Turkeys ( no pun intended) in charge cant vote for an early Christmas

Thanks to German magazine Der Spiegel I was looking at some startling facts about Greece. Greece is in 90th place in terms of competitiveness in a list of 142 countries
(just behind Lebanon, Georgia and Algeria). Not bad, could be worse you might say. Well that is until you find out that Germany is in 6 th place. The idea that 2 countries that far apart would share the same currency is crazy……….but they do

Remember all those reforms we heard about from Greece. That they would adhere to the cutbacks in the civil service as part of the enforced programme from the European Union, International Monetary Fund and European Central Bank, the Troika as they are known.
Well this is the status of the administrative reforms

Some 150,000 public-sector jobs are supposed to be eliminated by 2015, with 30,000 originally slated for elimination in 2011. In reality, 6,000 civil servants and other employees have lost their jobs. Mostly,they are people who would have gone into retirement anyway.

It beggars belief but most reforms and the sale of state assets are equally well behind the curve. I am not sure we owe Greece any more sympathy and frankly we shouldn’t give them any more money but they probably will.
 

Tuesday update…What fails to go down normally goes up

Well as I said at the weekend don’t chase the Euro down on Standard & Poor’s downgrades and here we are back up at 1.2755.It was an event that was heavily discounted and that is what forex trading is about. Some other things have helped one of them being Chinese data which was muted to be worse than expected and turned out better.
There is still scope for more upside if shorts get squeezed out but I do not have any great view on where a good level might be at the moment.We still believe in holding a core short position and would add to that at some stage. This week the Greek rescheduling talks hold centre stage and will likely determine the next decent move.

Headlines

• After hitting 17 month low Euro recovers to EUR/USD 1.2760
• Chinese GDP data comes in above expectations at 8.9% year on year
• Italy’s Monti calls for more help from Germany and on interest rates. What about some proper reform first Monti
• ECB´s Draghi. ¨Europe in a very grave situation¨……… well spotted
• Greek debt talks stalled on interest rates. The talks will resume this week. Banks are asking for much higher interest rates on new bonds although hedge fund holders may yet derail the whole thing. Remains a crucial factor in short term fortunes of the Euro so needs to be watched.
• Italians lose faith in the Euro. According to poles 55% of Italians have lost confidence in the Euro while a third would prefer a return to the Lire. That was when everyone was a millionaire
• European car sales fell in December.(Western Europe down 4.3% in December down 5% full year) BUT Germanys car sales rose 6%, 8.8% for the year. Fiat of Italy saw the biggest drop in December…………There may be trouble ahead as the song goes. More divergence of course
• EFSF ( European finance and development fund) downgraded by S & P to AA+ in line with France. It was not exactly an investors favourite when AAA but no real change for demand I suspect

For Euro shorts we may have to wait until economic data in Southern Mediterranean countries provides evidence of recession and I include France in that. Those countries have all agreed austerity measures but none have even begun to touch on the real problem of labour market reforms

Weekly review… Standard & Poor’s Friday 13th Part 1

As if it was some horror show Standard & Poor’s finally put markets out of the misery with numerous euro zone sovereign ratings cuts. France loses its hallowed triple A as does Austria ( France now AA+) .Perhaps of more significance was the group cut by 2 notches of which Italy ( now BBB) and Spain ( now A) are the largest borrowers.
Although the announcement came after the close of markets much had been leaked in trading time. While equities were lower and EUR/USD was back under 1.2700 it was no rout. Indeed it could be an error to expect a bigger sell -off on Monday certainly not on this news. Its been priced in already I would say.
What might be more worrying was the breakdown in Greek rescheduling talks. The rumblings there seem to point to perhaps the beginning of the end for Greece within the Euro.Provided enough of a back stop can be provided for them it may well happen sooner rather than later. Indeed prolonging it is now doing more harm than good.
The downgrade if Italy makes more of a splash I feel. There bond issuance program is an horrific spectre this year and a drop in status just adds to their troubles.
Anyway I have been looking at some of the euro zone countries so this fits in nicely

Italy
Earlier in the week ratings agency Fitch put off any cuts but was keen to point out that Italy remains the key problem within the euro zone. They noted that 1.5% growth and bond yields 1.5% above Germany would keep them solvent.Neither are within the remotest possibility with the spread against German bonds circulating around 5%
For all the austerity measures more than 20 billion will be eaten up in additional interest payments on new debt this year (€440 Billion) unless things change.
Italy lives beyond its means. A recent report into public sector wages, the Giovanni report was inconclusive but then again the very people who stand to lose most produced that report. Just look at Italian politicians who stand way at the top of Europe’s political pay league at €16,000 a month. France is 2nd on 13,500 and Spain way down at 4630 a month. Thus far cuts in expenditure while welcomed are not addressing the big problem of repealing labour laws. What’s more it seems that no one in Italy has the strength to take on the unions once and for all. This together with a tax collection system that is being exposed daily for letting citizens get away with murder when it comes to income tax contributions.So with the prospect of recession, falling tax revenues, higher interest payments, why should investors buy Italian bonds.
This weeks auction may have been ok but can Italian banks sustain buying all through the year and frankly at these levels of interest Italy cannot continue to be solvent.

Spain
Spain appears a little better off than Italy as bond yield near 5% show , purely on the amount of debt they have. They too had a better bond auction but once again this is Spanish banks buying Spanish government debt. What’s more the Spanish banks remain the real problem. Deleveraging is leaving no money for lending to the wider economy. Unemployment at 23% looks like its going to go up too. I am a great believer in seeing for yourself. When I arrived back at Barcelona airport on Monday the car parking company I use had gone bust ( Got my car but no keys so maybe I was lucky). All around where I live shops are closing. We wonder if in a few years we will just be left with the Chinese stores selling everything (Chinese) and they would appear to be the only buyers or renters of commercial property. Empty apartments are numerous as they are all over Spain. Every business you know of is complaining at the fall in spending. If it is a poor summer for tourists then this could be the last straw for many more businesses.

So we need a miracle to get back on track and that as we know seems unlikely from the ECB or Germans who now control the situation. The downgrades may well affect the ability of the EFSF (European Finance & Stability Fund) to raise funds respectable levels. They after all have Ireland Portugal and Greece to look after at the moment.
The Euro should probably not be sold next week. It is still a little oversold and as I said this could be a classic sell the rumour buy the fact job. Stock markets have started the year well and they will need to be watched. A general risk sell-off will not help the Euro but I still feel there is one good bounce left in it. Further down the road the US QE (Quantative easing) argument seems to be gaining momentum and you get the feeling the Federal Reserve will do it just because it shows they care.

One final thing. I do believe that the debt problem in the euro zone could be ended very quickly. As the citizens of Greece ,Italy and Spain have enjoyed so many years of their own false accounting paying in many cases derisory levels of tax I say let them, bail out their governments. Their pension money should be seized and used to fund debts. The IMF was designed to bail out the needy countries not poor governments from rich countries who’s residents paid inadequate taxes.Why should other EU countries whose residents pay their taxes subsidise those who don’t pay. Time to stand up Angela and tell them you pay not us. If the citizens of Italy thought they might lose their savings if they did not pay the correct taxes then that might spur them to do so. Bailouts for these are obscene and I do hope the Chinese or Indians do nothing to help.
On a political note I see Marie Le Pens National front lies just 2% behind Mr Sarkozy. and just 7% behind the socialists. OH what fun if she surges in the poles. It could be another Joan of Arc moment. Eric Cantona unfortunately has less chance of making the second round

Friday update… Euro short covering on Italian and Spanish bonds

Well it had to happen some time. A short squeeze on the Euro which has seen EUR/USD bounce a couple of big figures to 1.2865. The relative success of Italian and Spanish bond auctions led the move and equities and those bonds are a little better today. Put in perspective though, Italian 10 year yields are 6.6% from over 7% but unfortunately need another 5% on the downside if deficit numbers are going to add up. We certainly have potential for more upside but would look to sell again near 1.30
Technically the downside remains the order of the day unless we were well above 1.33 something I just don’t see.The ECB and bank of England remained on hold as expected although Mr Draghi tried to be a little more upbeat on the euro zone.

Headlines

• ECB Draghi. Tentative signs of stabilization in Euro zone
• Germany likely to downgrade 2012 growth estimates to under 1%
• German lawmakers feel Greek Euro zone exit can be managed ok
• Greece confident of debt rescheduling this week
• IMF not confident of Greek deal soon….that’s what makes a market
• China reserves hit $ 3.2 trillion…problems solved

CHECK OUT OUR WEEKEND REPORT ON SPAIN & ITALY ( Good reading only if short EUR/USD)
 

Thursday update… Olli signals Greek scenario for EU

It seems that EU commissioner Olli Rehn took some kind of truth drug over Christmas. Yesterday he admitted that the 2 month old economic projections which they considered realistic to pessimistic are in fact likely to be revised down as new data trickles in.Rehn said that once forecast revision was completed he´d be able to say whether EU countries in fiscal trouble would have to implement fresh measures to cut their debt and deficit levels.
I get no pleasure from saying I told you so but this is a Greek style scenario. Huge budget cuts in the form of reduced spending and higher taxes followed by, yes more of the same.The Euro didn’t like it and frankly I am going to revise our EUR/USD target down. EUR/USD 1.10. Yes 1.10 because in a few months its going to show just what a state the likes of Ireland, Portugal, Italy, and Spain are in. I am really not so sure that citizens of some of these countries can take another dose of austerity so soon.
Growth which is desperately required to reach new targets is non existent. Tax receipts are going down and interest costs up. Perfect Storm.
You can expect more rate cuts from the ECB but I am presuming that there will be no policy change from Germany or the ECB. For that really is the only get out of jail card for the Euro. A complete climb down by those two might save the day but then again perhaps its gone too far now anyway. Equity markets have seemed oblivious to weaker Euro data and maybe weaker Chinese data so potential there for a swift turn around, with a stronger US dollar to follow. Difficult to see the US dragging everyone else out of recession. Mind you a lower Euro isn’t going to be greeted by too much enthusiasm outside the EZ. Germany of course will be laughing all the way to the bank. We will be back to more divergence not convergence.Still it will be better from 2022 when many people of 35 will never have had a job but that doesn’t seem to be of any concern to the highly overpaid useless politicians. Many will be retired on gold plated pensions by then presuming their countries are still solvent.

Rumours of Standard & Poor’s cut to French ratings also made the rounds. I stick with my view on that one. Any sell-off will be brief and watch for a good bounce. It should be well and truly discounted by now unless it is by more than one notch

Headlines

• EUR/USD falls to low of 1.2661 on Rehn statement and French ratings rumours. Recovers above 1.27 in Asia
• ECB & Bank of England meetings..No changes in rates
• Spanish bond auction today. 3 & 4 year auction will likely be well supported by local banks
• Bill Gross PIMCO chief on TV… Expects $500 billion of QE from Fed this year. Not buying Italian debt even with 7% plus yields
• China inflation 4.1% ( 4% expected)
• Hildebrand takes 1 million pay off from SNB as his involvement in family trading is questioned. Maybe he is being sacked because the Swiss National bank lost 25 billion unlike super Bernanke plus 90 billion

Where are they now

It seems my Christmas wishes have come true. Haven’t heard a tweet from the EUs Batman & Robin . Yes my two favourites Barroso and Van Rompuy. Maybe sense at last. Sack them save probably 500,000 Euros a year. Well its a start and about time the EU led by example cutting budgets. ( Make that one Million Euros I forgot about expenses)

CHECK OUT OUR WEEKEND REPORT ON SPAIN & ITALY ( Good reading only if short EUR/USD)

Wednesday update…..Euro fails again despite better investor sentiment

Despite firmer equities and a slight improvement in euro zone peripheral bonds the Euro managed very little of a recovery and has been back to EUR/USD 1.2730 this morning currently 1.2775. It ran into some pretty large sell orders in the 1.2810/20 area we hear, certainly large enough to scare off the bulls at any rate.Ratings agency Fitch seemed to indicate that Frances AAA status would be preserved for 2012 but signalled the likelihood of an immediate cut for Italy. Olli Rehn EU VP believes the crisis is not yet behind them which tells the truth for once. He rightly pointed out that for all the deficit cutting action by Italy and Spain neither has addressed the fundamental problems in the way of Labour reforms required. The failure of EUR/USD to push on yesterday despite some QE chatter does not seem to offer much hope on the upside for now. In any event yesterdays hurdles of EUR/USD 1.2810/20 will attract further good sellers we can assume.

Headlines.

• Greek bond swap.. Discussions continue to try and finalise details on the bond haircut before the next tranche of aid. It appears hedge funds may not be prepared to play ball preferring a complete default to any concessions
• Gold edges above 200 day moving average intraday but closes below, at $1632
• Federal Reserve makes US$ 79 Billion in 2011. It just goes to show that if you hold all the cards you can make easy money. Poor Mr Bernanke if this was an Investment bank he would be looking at a billion dollar bonus
• IMF Lagarde meets with Merkel and Sarkozy but no press releases yet
• Germany sells 6 month bills at negative rate. This just about sums up the euro zone mood. Investors choose to park money with Germany at small negative rates

Tuesday update… Hildebrand resigns from Swiss National Bank

Well it seems that Mrs Hildebrand’s forex trading was too much for her hubby to carry on in the job so an announcement expected today on his successor. What a way to lose your job.Talking of which, Famous Manchester United footballer, Frenchman Eric Cantona has launched an attempt to stand in the French Presidency race. The man is an eccentric who knows nothing about running a country which sees him well qualified.
Back to forex markets and no fireworks yesterday. I can still see a Euro bounce on better equity markets and rumblings from Merkozy of an early announcement on the ´Fiscal Compact` and accelerated payments to the ESM ( European Stability Mechanism). That’s a selling opportunity mind you and thus far its been dead cat bounces all the way. Greece remains stubbornly in the you know what. Talk of another haircut for investors. Makes owning credit default swaps a joke if someone doesn’t call default soon.EUR/USD currently 1.2755

Headlines

• Hildebrand resigns from Swiss National Bank over wife’s forex trading
• China Trade data. Export and import growth slow as surplus expands
• Major Swiss player says sell EUR/USD 1.2755 ( Stop at 1.3050 Take profit 1.2250) Its a bank not Mrs H

Pain in Spain
When I arrived back in Spain last night from Ireland with my family the Car Parking company in Barcelona who I use had gone bust. Got my car back but no keys. It seems that things are slowly getting worse and spending will continue to decline. Animosity towards the richer Europeans will grow