Weekly Update

Risk appetite improves on economic data and no Greek tragedy.

Generally positive Economic data encouraged equity rallies which helped arrest any further dollar rally and led to the Japanese Yen losing ground against most currencies. The Canadian Dollar and Australian Dollar led the gains against the yen as commodities rose, Crude oil closing at 81.50.
In the week ahead any continuation of this may see further declines for the Yen and US Dollar.The Euro remained unchanged against the dollar despite improved risk appetite and marginally improved sentiment for Greece, who managed to secure their Euro 5 Billion 10 year Bond auction successfully.However, it may be that this week that the Euro is able to make more headway against the dollar particularly if the equity markets continue to improve.
Sterling which began the week in free fall on the back of weekend opinion polls and rumors regarding the Prudential , AIA takeover recovered to close the week much as it had started. The sell off , however, does indicate how fragile the currency is. In the build up to the election it offers the prospect of some serious volatility and generally sentiment remains poor despite some better economic data.

I stick with the view of seeing 1.40 Euro/US Dollar before 1.30. The week ahead offers very little in the way of exiting economic data so currency markets may well take their lead from equity markets.

Finally,I have to include a comment of the week which comes from Greece.

The Greek prime minister said he will fight to ensure speculators don’t undermine his push to restore order to the country’s economy. It’s unjust and undemocratic that his efforts are being undermined “by some ‘kids’ in New York and elsewhere sitting in front of a computer,” he said yesterday.

Well George they were the same boys who helped you fudge the budget numbers to get in the Euro in the first place.

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.