Weekly review ………Deal or no deal, Greeks saga continues

Before we chew over events of last week this weekend is supposed once again to provide the final touches and agreement for Greece to get its next €130 billon ( although maybe €150 billion) bail out . According to press reports no such agreement has been made yet. The sticking point being the Greeks refusal to accept more budget cuts ( health and defence) but more importantly agreement on private sector wage cuts including a cut in the minimum wage. It seems the only agreement is that both sides feel they have done enough. The Greeks on austerity and the troika, but principally the Germans and other AAA countries who refuse to part with more taxpayers money unless the Greeks do more. I get the feeling that either way its not going to be a happy ending but that’s not to say markets still wont take a lift if and when an agreement is reached.
Generally risk markets ( bonds and equities) improved last week. Firstly in the euro zone bond markets in Italy and Spain have improved.Secondly the economic data has been either ok or as in the US on Friday,the January employment data much better. The US added 243,000 jobs ( expected 145,000) and headline unemployment was 8.3 % ( expected 8.5%). The upshot was equities edged up again adding between 1 and 2 % on Friday.
Things have not been so clear in forex markets although the Australian and Kiwi dollars were at the top of the pile. The US dollar was a smidge easier but the Euro did very little once again snuggling up to 1.3150. It seems that we need something extra or get us to EUR/USD 1.33 or 1.26, which brings us back to deal or no deal.
You would think that the likely conclusion will be a reluctant climb down from Greece but even that is not a certainty.
Purchasing Manager data now widely watched by markets was a little better in Europe although the gap between the still deteriorating Southern Med countries and the off the worst declining level Northern Europeans, still persists.In the US it was better still.
Latest information from the currency futures exchange still points to a hefty short in EUR/USD which bares consideration as it could yet point to a bigger squeeze on shorts. Fundamentally though little has changed and therefore still leaves the Euro vulnerable.The uncertainty persists and while equity markets are leading us to believe its all going to be ok, investors would be wise to keep an eye on the exit. Chinese data has thus far been in the ok camp but could yet rattle markets if it slides. The same could also be said of some geopolitical event.

Headlines

• US…. unemployment falls to 8.3% ( expected 8.5%)
• US ….adds 243,000 jobs in January ( expected 145,000)
• US…. ISM non manufacturing PMI 56.8, highest since Feb 20011
• Switzerland….. Central bank states 1.20 Euro peg is a minimum. EUR/CHF up 20 pips at 1.2070. Any ideas of raising the peg look fanciful.
• QE… The debate on quantative easing continues. Its likelihood at some stage remains a slight negative still on US dollar sentiment
• Central banks…. Talking of QE the ECBs balance sheet now (in US dollar terms) is 3.5 trillion against the Feds 2.9 trillion with lots more expansion likely at the next long term auction at the end of February.
• Currencies.. Mixed, Australian $ hit all time high against the Euro while the Japanese Yen weakened against all on intervention fears.

It appears that talk of Mr Berlusconi disappearing from politics may be premature if his own opinion of his popularity is anything to go by. He says, I still have strong popular backing, almost twice as much as my colleagues Merkel and Sarkozy,” he said. “In opinion polls, I personally have 36 per cent support. If I walk out in the street I stop the traffic. I am a public danger and I cannot go out to do the shopping!”
That’s probably akin to Russian support for communism, some habits just will not die off.

Wednesday update… Early dollar weakness evaporates as Euro zone problems weigh on currency

Check out what are Greece´s problems in a nutshell

What started well for the Euro finished differently. EUR/USD did indeed make it up to 1.3215 yesterday morning but by late afternoon the Euro was on the skids. It fell down to EUR/USD 1.3062 yesterday and lower to 1.3025 overnight. On crosses to under EUR/GBP 83 some 1 % lower against sterling and back under 100 against the Yen. It may well be a trading range for a while so suggest more sells above 1.32 if we go there. Nothing wrong in adding 100 plus points or more on day trading.I am not sure what triggered all the selling, ,maybe all the talk of US dollar month end selling caught a few longs out.Or maybe someone looked at the fundamentals. Remember those well they are sound economic reasons for a currency move and what’s more here are some.

Unemployment data within the Euro zone continues to show the fundamental problems that lie within the union. German unemployment numbers showed an improvement to a record low of 6.7% from 6.8% while in Italy things went in the opposite direction to 8.9% from 8.7% . Overall eurozone unemployment was at 10.4% .
Whatever the photo shoot shows there remains deep divisions on opinions on what to do with Greece. Germany remains angered at the lack of Greek progress on labour reforms and is balking at the idea of increasing the bailout with Portugal in the queue behind and maybe even Ireland behind them.
Market participants exposure to EUR/USD positions remains the highest and are overwhelmingly short.The strength of the bounce from close to EUR/USD 1.26 reflects this although one assumes that most players are still on board. Fundamentals for the euro zone remain appalling but as we all know from the past it may not reflect in forex moves when we all think. The problem of Greece has now rumbled on for 2 years and the southern Mediterranean block of countries are continuing to diverge from Germany and the strong, as their economies suffer. We have not seen the worst.

Headlines

• Germany. Unemployment falls to lowest level since unification 6.7% in stark contrast to many Euro zone countries. 23.8 million out of work in the euro zone tells you it aint working.
• UK Financial Times … reported speculation that banks may double up at the next ECB 3 year LTRO (Long term refinancing operation) in February. Remember the € 490 billion banks hoovered up in December. This would indicate Euro zone banks on ECB life support as normal funding has dried up. Is his QE? Some say yes.
• US budget office announced that the US deficit shrunk to US$ 1.1 trillion this year. Was that good or bad news, but they can still borrow 10 years under 2%
• US Case Shiller home price index falls 3.7% YOY against 3.3% expected. Knocked equities more than the dollar. There are many hanging the hats on a bottom in the US property market this year. Sentiment would be lifted but nothing to suggest that here.   
• China pmi 50.5 from 50.3. Still expanding

Greece… Its problems in a nutshell
Thank you to Der Spiegel magazine for much of this data

In Athens the government is at least spending € 20 billion less than it was in 2009. Unfortunately its debt situation gets worse as it enters year 5 of its slump
Greek November retail sales were down 11.6% YOY (year on year) which was worse even than Octobers 10.8% YOY decline
When looking at how they might turn themselves around their biggest exports are olive oil , textiles and a few chemicals, hardly the stuff of an economic renaissance.
Add to the fact that Greece is dependant on food imports and you see why life outside the Euro would actually appear so frightening.
Tourism so long a lynch pin of Greece has become a summer industry only ( no one wants to visit their cities in current circumstances) and a recent study of its hotel & tourist industry wages in comparison to competitors shows just why they are in such a state
Per hour wages in tourist industry
Greece € 11.39, Portugal € 8.49, Turkey €4.00 and Bulgaria €1.55.
The problems have developed over years and will not be solved if at all for many years. As I have said before who dreamt up sharing a currency with one of the worlds most efficient and competitive industrial manufacturers, Germany. Plain nuts, but that’s politicians for you.

Weekly review… US Dollar weakness outweighs Euro zone reality for now.

Its not the being wrong that hurts its not understanding why.That is what it feels like seeing EUR/USD back at 1.3220 on Friday. The consolation is that I always felt it was a possibility and I have some ammunition left. The US dollar suffered because the Feds Bernanke chose to call interest rates at zero until 2014 and leave the door open for QE3. This sustained equity markets through the week and put pressure on the currency.and even a slightly disappointing GDP figure from the US ( 2.8% instead of hoped for 3% ) did not upset the trend. What is interesting is that the US Commodity and Futures Trading Commission data showed an increase of Euro shorts of 10% over the week to a record $28.1 billion. So there was no short covering from that crowd which means that a real shakeout is still possible. Or you can take it like me that if we go down we will all go down together, ha ha.
The Greek debt saga has carried on another week when it was supposed to be a whisker away from agreement even 2 weeks ago. Quite possibly an announcement of conclusion next week could give a knee jerk up move for the Euro but that will be a wonderful sell opportunity to my mind. By all accounts the Troika ( EU, ECB and IMF) are still insisting on more action from Greece on reforms and weekend press has speculated that the IMF in particular wish to take the reigns of management totally away from Greece, no autonomy what so ever. Well that will not work and with Portugal waiting in the wings to follow Greece in its downward economic spiral the problems are mounting. Spain’s unemployment data was appalling, up to nearly 23% at 5.3 million and likely to get worse.
In Davos, Switzerland at the world economic forum the Euro zone leaders were subjected to a tirade of negative comment but with little or nothing in the way of new ideas.The EU summit this week is expected to confirm the new fiscal pact and at least some kind of financial help for youth unemployment which is up near 50% in some areas. For sure if something is not done soon then social unrest will follow.
At this point I am not sure where I might panic on my negative EUR/USD view. We could go higher to 1.3400 even but I cannot see beyond that level. In any event I will add to shorts at these levels and more if we go higher.
I believe that Iran’s parliament is due to vote today ( Sunday ) on stopping EU oil exports immediately rather than the EU plan of June. This could definitely be an issue to unsettle risk markets if passed, pushing oil immediately higher and presumably equities lower and the US currency back up. One to watch anyway

Headlines

US.4th Qtr GDPup 2.8% just below 3% expectations
US..FOMC Bernanke signals low US interest rates until 2014 and leaves possibility of more QE
IMF Lagarde.. Says IMF would not risk its reputation by lending money without conditions ( aimed at Greece )
Spain. Unemployment surges more than 350,000 in 4th Qtr. Worse to come I am afraid
Germany.. A growing band of commentators and politicians consider Greek default and Euro zone exit likely. This apparently includes Angela Merkel
EUR/USD hits high of EUR/USD 1.3235. Technical resistance remains at 1.3245/55
UK… Prime minister and chancellor pull no punches in Euro zone criticism and are scathing of Financial transaction tax plans

I leave you with the comments of Nouriel Roubini. Dr Doom as he is known having predicted the financial meltdown of 2008 and a man who I assume is also short EUR/USD

“The eurozone is a slow-motion train wreck,” Mr Roubini said. “Countries – and not just Greece – are insolvent. I think Greece will leave the eurozone in the next 12 months, and Portugal after.”
The New York University professor of economics was speaking at one of the final sessions of the World Economic Forum annual meeting in Davos.

“There is a 50pc chance that the eurozone will break up in the next three to five years. This doesn’t look like a G20 world it looks like a G-Zero world because there is no agreement on global imbalances, how to change the international monetary system, international trade, banking regulation, on all the fundamental issues.”
 

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

Friday update. Euro still on back foot but technical bounce possible

Sorry for the lack of updates folks but it seems in some parts of Ireland the internet mouse fell off the wheel for a few days ( Well it has been gale force winds poor thing). Talk about back in time.

Anyway my conclusion to the first few days of trading seems to show that Euro weakness has continued be it risk on or off.. Whatever seems to be happening in equities or bonds for that matter has done little to support the Euro. Elsewhere the US currency performance remains pretty mixed. However, I would not rule out a decent bounce today perhaps 100 pips or more although much may depend on the French bond auction and US Non Farm payroll data. The rhetoric from eurozone politicians and central banks remains the same but forex players just don’t believe all the spin. Any corporate treasurer worth his salt should be making provisions for at least further euro zone tensions if not a complete break up.That seems to be reflected in price action for EUR/USD. This is not all speculative selling its real money running away to a safer haven.

EUR/USD having been down to 1.2760 ( weekly low 1.2585) could make it back to 1.2900 but I would not bet on that with a long position as just above EUR/USD 1.2500 would remain my short term target.

I have noticed that while away from Spain the new government has done just as I thought which is get all the bad news out on the table quickly. Budget deficits for last year were raised and likewise bank capital numbers. Still worse to come me thinks and thanks for the tax hikes, that will get me spending.

Here in Ireland economic conditions remain about as bad as the weather. Yesterday though it was reported that 13000 jobs were added from overseas companies (6000 lost) but at least its headed in the right direction. Ireland may need to renegotiate loans and will Mr. Sarkozy insist on a change in their corporation tax levels which seem to be sustaining the modest improvement. To my mind this is typical of what is wrong with the euro zone and you can expect the Irish to tell the Frenchman to naff off.

Elsewhere it is still rumor city be it North Korea, French downgrades or economic data.

A French downgrade is in the market now so don’t expect much downside when it happens and it might even be worth a quick profit take. Mind you watch out if its worse than expected or carries further health warnings. By and large though its probably shaping up for a classic sell the rumor by the fact job

Other News

• Belgium 2012 budget rejected by European commission. Another over optimistic projection but who cares.
• Tax evasion Italian style. Check out this Telegraph article
• ECB continues to support euro zone bond markets
• Large French bond auction today
• US NFP (Non farm payroll) data now expected to be better than expected. ( In which case its now expected to be better so watch out if you get my drift)
• Solid technical support for EUR/USD between 1.2625 and 1.2525 remains a tough hurdle for a while.
• No austerity protests in Ireland. The weather is just too bad to get anyone on the streets in Ireland no matter what mood and a pint of guiness in a bar still wins out at the moment
•  

Friday Update… Christmas spirit prevails

As markets generally limp over the line to Christmas equities have continued a better tone providing a small lift in commodities and calm forex markets.
Indeed if the thin markets of the next week allow stocks higher we could have more of the same.
In currencies not much to talk about although the record high for the Australian dollar against the Euro is worthy of note. Australia and Canada as commodity currencies cold suffer in the event that world growth is lower than expected. However, they are beacons of light as far as country risk goes and will continue to benefit as China and others with huge reserves diversify and investors seek safer ground.
EUR/USD has made little ground back, settling just under EUR/USD 1.3100 despite the friendlier markets and sentiment is still very poor in the euro zone.
The challenges for that area remain and will be the focus again for next year. Unfortunately it looks like more of the same. Reactive rather than proactive policies.
Europe has another summit organised at the end of January on the issue of growth or lack of it. More likely there will other crisis by then to discuss.

Headlines.

• US employment data better than expected
• US GDP Q3 revised to 1.8% from 2%
• US house agrees 2 month extension to payroll tax . Rearrange these words. Can kick the road down the
• Italian austerity measures passed by senate. Next year focus will be on implementation of reforms. Will it happen quick enough or at all.

I would like to take this opportunity to wish all our readers and traders a very happy Christmas and prosperous New Year

Thursday update… Huge European Bank Heist

If you doubted a major Euro zone credit squeeze then now you have the evidence

Cash strapped European banks took an amazing €489 billion off the ECB at the 3 year LTRO ( Long term Refinancing Operation) overshooting estimates by almost €200 billion and spooking markets. This was particularly in the case of Italy who were reported to have accounted for 116 billion. There was also concerns regarding collateral which was created by the issue of state backed bonds by banks there.
So we had an about turn in everything and actions designed to calm markets with a huge liquidity injection are causing concerns at the numbers required ,overtaking the 442 billion 1 year refinancing in 2009 at during the last financial crisis.

In forex markets the US dollar rose of course with EUR/USD back closer to 1.3000 and the Euro itself weaker on the crosses. However this morning we have risen back to 1.3100 in quiet trade.

As all markets begin to get thinner watch equity markets as perhaps the driver of events in the next few days. A rally in stocks might still feed through to forex markets but time and enthusiasm would appear to be slipping by.

Headlines

• European banks take 489 billion Euros in 3 year financing from the ECB
• Euro zone peripheral bonds weaken undoing Wednesdays gains
• Commodities and Gold lower. Gold back under its 200 day average ($1623)
• Spanish pm chooses ex banker and economist Luis de Guindos as finance minister
• ECB announces 500 new jobs in its collateral checking department

Wednesday update.. Markets rally on less bad news and back door QE

With equities and Spanish and Italian bonds rallying it was enough to turn the whole pack around with a weaker US dollar and stronger commodities. Nothing gung-ho but enough for forex markets to push EUR/USD back over 1.3100 and possibly nudging up towards 1.3200 today
The main event today will be the great ECB 3 year lending package. I think you can expect a massive take up by banks ( 300 Billion at least) as a back stop for them. It is though along with proposed IMF lending a backdoor quantative easing by the ECB. Lending by the ECB to governments all be it via third parties.
For the banks who are desperate for cash it will help them and also allow further buying of their own countries bonds. Next year I think cross border buying of government bonds in the Euro zone will be minimal but domestic banks will support their own countries( bad luck Italy)

News

• Euro zone peripheral bond spreads tighten
• Equities open higher in Europe as US markets pushed up overnight
• Look to sell EUR/USD near 1.32
• Moody’s hints at UK AAA problem. Moody’s believes the UK triple A status could be under threat if European troubles derail the UK plans.
• Japan likely to downgrade growth forecasts
• Japan reports record foreign holdings of Government bonds (JGBs) . Another safe haven

Tuesday update… EU Finance ministers agree modest IMF package

Not much in the way of excitement yesterday although EU finance ministers did cobble together a € 150 Billion package to boost IMF coffers hoping others might follow.
Even those with a tiny grasp of economics will note that this is chicken feed compared to the financing needs of Europe next year. At least they had the good sense to exclude Greece Ireland and Portugal from contributions, while the UK took the opportunity to duck out of the EU group and possibly align with other G20 countries.
It is increasingly evident that outside Europe the begging cap is getting little sympathy.
As far as markets are concerned there was little to feed off. Forex moves were very limited and while some are predicting a short squeeze on EUR/USD shorts in thinning Christmas markets others myself for sure would consider a bounce to 1.3200 or 1.3300 a real Christmas gift. While there are some bearish views for next year what could really surprise everyone is a big euro sell off in pre New Year markets. Whichever, if you are going to get caught in thin markets, make it being short is my call. I am convinced lower 1.20s looms somewhere.

Other news

• French Trade minister predicts France trade deficit 2011 at record 70 to 75 billion euros. In bold because this is the fundamental problem in eurozone which is not being addressed
• Swedish Riksbank just cut repo rate 25 basis points to 1.75% sighting slower growth and detraining economic outlook abroad
• ECB Draghi continues to paint a bleak picture for the eurozone with no policy change in sight.
• Spain’s Ranjoy calls for ECB to be lender of last resort
• Kim Jong dies without telling anyone his computer password

Friday update….. Talk about An-Noyer

I should say, I am very annoyed. ECB Noyer (French) espouses that it is the UK that should lose its Triple A status because it has higher deficits, more debt and less growth than France.
I would say that is bang out of order in Central banker language. Anyway the UK has a central bank , its own currency and its economic governance is not being transferred to Germany.

Risk had a lift yesterday with equities and commodities bouncing. The Euro alas was involved in a dead cat jobby. Forex markets less inclined to give the Euro a bounce. We failed to get above 1.3050 despite a better day on the news front. Still needs to be shorted at every available opportunity with no change of policy on the horizon.

Headlines

• Euro makes a feeble come back against most currencies.Closed close to 1.3000 and a whisker higher in the Far East
• You couldn’t rule out a bigger bounce but don’t count on it 1.32 beginning to look too far
• Spanish enjoy good bond auction. Looks like Italy drawing ahead as next problem child
• Swiss keep their peg unchanged at 1.2000 ( no move to 1.25) Keeping the threat of course but sensing trouble ahead maybe. Swiss franc a little stronger
• Eurozone PMI data stops falling 47.9 vs. 47 ( 46.7 exp) Slightly better data but still under 50 indicates contraction.
• US data remains one of few market positives.
• Ratings agency Fitch knocks the major Investment banks

Remember, ever thinner markets in whatever you are trading. Forex volatility could pick up towards year end