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"Why is a Greek exit so dangerous?"(2012-05-30)

Why is a Greek exit so dangerous?




A Greek exit from the single currency bloc is a burning question: words “increased uncertainty” have become a fixed collocation in recent months. Market participants massively abandon the common currency: EUR/USD has fallen 6% in May. Why does a tiny Greek economy strike terror into the hearts of investors?


According to analysts at Bank of America and JPMorgan, a so called “Grexit” would create a domino effect to other European countries: sovereign defaults, bank runs, credit crunches, recessions and, finally, new exits.


Economists at JPMorgan estimate that 1% economic slump in the euro zone economy will trigger 0.7% decline in the other countries. All the exporting countries are extremely vulnerable to Europe’s crisis, no matter if it is Great Britain, Russia or China. U.S., however, is forecasted to cope with upcoming problems with a smaller damage for the economy.


In case of exit analysts at Bank of America forecast the euro zone’s GDP to contract by at least 4% during the recession, what is close to the decline after Lehman Brothers collapse in 2008. The common currency is expected to fall to $1.20 levels. Other euro zone’s countries except Germany would suffer from increased borrowing costs (Spain’s bond yields have already reached critical 7%). However, strategists expect Greece to remain in the euro zone because of the high cost of the alternative.


According to economists at University of California, the influence of the Grexit on the global economy will depend on the preventive measures, taken to limit the contagion. If the efforts prove to be insufficient, the economic system will get beyond the control. Citigroup analysts are convinced that Greece will leave the euro zone on January 1, 2013.

Cartoon: Tom Janssen






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"Bank of America: comments on USD/CAD"(2012-05-30)

Bank of America: comments on USD/CAD




A Greek exit from the single currency bloc is a burning question: words “increased uncertainty” have become a fixed collocation in recent months. Market participants massively abandon the common currency: EUR/USD has fallen 6% in May. Why does a tiny Greek economy strike terror into the hearts of investors?


According to analysts at Bank of America and JPMorgan, a so called “Grexit” would create a domino effect to other European countries: sovereign defaults, bank runs, credit crunches, recessions and, finally, new exits.


Economists at JPMorgan estimate that 1% economic slump in the euro zone economy will trigger 0.7% decline in the other countries. All the exporting countries are extremely vulnerable to Europe’s crisis, no matter if it is Great Britain, Russia or China. U.S., however, is forecasted to cope with upcoming problems with a smaller damage for the economy.


In case of exit analysts at Bank of America forecast the euro zone’s GDP to contract by at least 4% during the recession, what is close to the decline after Lehman Brothers collapse in 2008. The common currency is expected to fall to $1.20 levels. Other euro zone’s countries except Germany would suffer from increased borrowing costs (Spain’s bond yields have already reached critical 7%). However, strategists expect Greece to remain in the euro zone because of the high cost of the alternative.


According to economists at University of California, the influence of the Grexit on the global economy will depend on the preventive measures, taken to limit the contagion. If the efforts prove to be insufficient, the economic system will get beyond the control. Citigroup analysts are convinced that Greece will leave the euro zone on January 1, 2013.

Chart. Daily USD/CAD









Chart. The Thomson Reuters/Jefferies CRB Index






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"Italian auction results disappoint"(2012-05-30)

Italian auction results disappoint


Italy’s 10-year bond yields overcame the critical 6% level for the first time since January, confirming that the euro zone’s crisis is gathering pace.


The country managed to sell 5.73 billion euros of 5- and 10-year bonds out of its maximum 6.25 billion euros target. As a result, the yield spread between Italy and Germany’s 10-year bonds increased to 465 basis points.


According to most analysts, Italian perceived creditworthiness is impaired mostly by external factors.

Photo: Independent Report










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"Key options expiring today"(2012-05-31)

Germany avoids recession, but PMIs upset


Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2500, $1.2560, $1.2570, $1.2625 and $1.2650 (large);
USD/JPY: 79.00, 79.80 and 80.00;
AUD/USD: $0.9820, $0.9850, and $0.9900;
NZD/USD: $0.7600;
USD/CHF: 0.9600;
EUR/GBP: 0.8100 and 0.8125.

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"June 1: currencies & economic background "(2012-06-01)

June 1: currencies & economic background


The summer has begun in the risk-off mode. Chinese manufacturing PMI disappointed: official figures were down from 53.3 in April to 50.4 in May (that still means expansion, but the critical 50 level is getting closer), while HSBC index dipped from 49.3 to 48.4 vs. 48.7 expected.

US dollar gained versus the majority of its peers as a safe haven with the Dollar Index (DXY) reaching 21-month maximum. Even USD/JPY is trading on the upside as investors went long due to potential intervention, but got only the usual verbal commitments from the Japanese Ministry of Finance, so the pair has already erased some of its advance.

Euro’s attempt to interrupt the long decline against the greenback ended in red yesterday. EUR/USD has been steadily renewing 2-year minimum this week: today is set at $1.2323. Australian and New Zealand currencies are set to complete 5-week declines against the dollar as Asian stocks fell. The MSCI Asia Pacific Index of shares lost 0.9%.

In Europe it’s all about politics. The markets are waiting for the results of Irish referendum on the fiscal pact – Ireland is the only country to put the EU plan to a public vote. Although the polls indicate that the legislation will be ratified, one can’t eliminate the possibility of unpleasant surprises taking into account the fact that Irish voters rejected 2 previous referendums. The results will be announced tonight. In addition, the ECB is pushing Germany to give up its opposition to direct euro-area aid for struggling banks.

Important data to watch today:

Great Britain: According to forecasts, manufacturing PMI will decrease to 49.7 in May from 50.5 in April, indicating industry contraction and augmenting concerns on the UK economic conditions. Great Britain holds a 10-year bond auction.

Canada: GDP in March may have added 0.3% in March after an unexpected contraction by 0.2% in February.

US: Analysts expect the US non-farm payrolls to increase by 150K. In April the labor market didn’t fulfill expectations rising only by 115K, far below the 172K consensus forecast. The March unemployment rate is predicted to remain unchanged at 8.1%. The ISM manufacturing PMI in May is expected to drop slightly to 54.1 compared with 54.8 in April

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"BOJ: judging the intervention risk "(2012-06-04)

BOJ: judging the intervention risk



Bloomberg data shows that Japanese currency lost 10.4% versus its main counterparts in the first 3 months of the year, but then added 12.5% since March. Last week yen, a popular safe haven, has made the biggest weekly advance versus the greenback in 2012. During the resent months USD/JPY has been steadily trading below 1995 minimums in the 80 yen area.

However, analysts at Morgan Stanley note that yen still isn’t overvalued compared with 1995: on a trade-weighted basis yen is “roughly” in line with its average over the past 2 decades and would need to appreciate to about 55 yen per dollar to equal its strength in the mid 1990s.

Japanese authorities keep saying that they are ready to act in order to weaken the national currency. The nation’s Ministry of Finance sold 14.3 trillion yen ($183 billion) in 2011. The last time it sold the currency was on November 4 – the sales were unannounced and came to the market’s attention after the data appeared in February. There’s talk about the BOJ’s stealth intervention on June 1.

Investors don’t believe that Bank of Japan’s intervention will be able to prevent further yen’s appreciation taking into account the current situation in Europe and its negative impact on the markets all over the world. According to PIMCO, the probability of Japan intervening at yen’s current level and pace of change is low as last year yen’s sales were unsuccessful. RBC expects yen to keep strengthening 73 per dollar and 93 per euro by year-end. In their view, “the goal of Japanese officials is to manage the pace of appreciation in the yen and not try to engineer its outright weakness.”

Chart. Daily USD/JPY





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"UBS: short- & longer-term comments "(2012-06-04)

UBS: short- & longer-term comments



EUR/USD: neutral in the short-term. Recovery is likely. Resistance lies at $1.2650 (38% retracement of the May decline). Support is at $1.2288.

GBP/USD: neutral in the short-term. Upward correction may continue in the summing days. Resistance is at $1.5410. Support lies at $1.5235.

Analysts at UBS claim that the recent weaker than expected data in the US could make the market expect the Federal Reserve to launch the third round of quantitative easing. At the same time, the specialists still favor the safe-haven dollar amongst the major currencies as the Fed’s actions are surrounded with uncertainty, while the rest of the main central banks could resume their stimulus as the crisis in the euro area remains unsolved.

Chart. Daily EUR/USD





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"Expectations ahead of the ECB meeting "(2012-06-04)

Expectations ahead of the ECB meeting



This week is packed with the major central bank meetings. We’ve already pointed out that the expectations for the RBS rate cut have significantly strengthened in the recent days, what about the ECB?

Policymakers of the European Central Bank are meeting on Wednesday, June 6. In May the central bank left kept the interest rates unchanged at the record minimum of 1% for the fourth month in a row.

Analysts at IHS Global Insight think that the ECB will take a wait-and-see approach. In their view, European monetary authorities would like to wait for the results of Greek elections on June 17 as well as some economic growth figures. The specialists think that the ECB will slash the borrowing costs in Q3, probably in July.

Deutsche Bank points out that the ECB may decide to accelerate a possible policy response before the next Bank Lending Survey in July due to the weaker European economic data, especially the last flash PMIs indicating a significant slowdown in Q2 output after Q1’s flat print. At the same time, the ECB reiterated that the final responsibility for crisis resolution rests on Europe’s politicians. Economists see a cut in the refinancing rate or, less likely, another 3-year LTRO as possible outcomes.

Strategists at BNY Mellon expect no change in the ECB’s rates or stance. However, the specialists think that the central bank may signal that it’s ready to do more. In their view, Draghi is a tricky character to judge so it impossible to know whether he is susceptible to political pressure to cut rates. The bank says the market hasn’t positioned itself towards any solid expectations for the decision, “otherwise the euro would be trading higher.” But there are bets at the margins so the bank expects the euro to strengthen on any remedial action by ECB such as a liquidity injection.

Photo from http://crackerjackfinance.com





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June 5: economy, policy and currencies
Tuesday, June 5, 2012 - 07:19

Today is quite eventful.

Finance ministers and central bankers from the G7 nations will hold an emergency conference call today to discuss the euro zone’s debt crisis.

Traders covered euro shorts in case the policymakers arrive to some new measures. However, investors will keep selling the single currency on its advance. For now EUR/USD dipped below today’s opening price sliding to $1.2490 after testing resistance at $1.2540 earlier today.

Demand for higher-yielding assets improved, Asian equities went up making US dollar and Japanese yen lose versus the majority of their peers. The MSCI Asia Pacific Index of shares added 1% after declining for 4 days in a row.

As it was expected, the Reserve Bank of Australia cut its benchmark interest rate by 25 bps to 3.50%, the lowest level since 2009. Australian Q1 current account deficit came in line with expectations (AUD$14.9 billion). AUD/USD gained after the RBA’s announcement as the markets were ready for bigger cut.

Data to watch today:

9:00 a.m. GMT – euro zone’s retail sales, forecast: -0.1% m/m in April after +0.3% in March.

1:00 p.m. GMT – Bank of Canada’s rate decision: the borrowing costs are seen unchanged at 1%.

2:00 p.m. GMT – ISM Non-Manufacturing PMI: May readings are seen almost unchanged from April level (53.5).

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"USD/JPY remains under pressure "(2012-06-05)

USD/JPY remains under pressure



There's a talk that Japan conducted stealth intervention on June 1 to weaken the national currency and support the pair USD/JPY which spiked below 78 yen hitting fresh 4-month low at 77.64 yen. Analysts at Totan Research, however, don’t think that the nation has sold yen last week citing their analysis of the Bank of Japan’s current-account balances.

Analysts at Bank of America claim that US dollar may slide to 75.56 yen (October 31 minimum) as risk aversion will likely keep prevailing at the markets.

USD/JPY lost about 150 pips last week. The greenback managed to close last week above the lower border of the weekly Ichimoku Cloud. However, Tenkan-sen has crossed Kijun-sen upside-down - bearish signal. In addition, the prices have fallen below the 50-week MA, which is now playing the role of resistance. The daily Ichimoku chart oints at the downtrend.

At the same time, specialists at Westpac claim that “dips in the pair towards the low 78.00 region are likely to be well supported. Moreover, we are not too far away from previous intervention levels and if risk appetite does improve/stabilize we suspect the recent run of JPY strength can come to an end.” FBS thinks that the pair will have chance for recovery only above 78.72 (June 1 maximum) and 79.00.

Chart. Weekly USD/JPY




Chart. Daily USD/JPY





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