Germany caves in to demands to help Greece

Just over a week ago the euro was floundering and had dipped below 1.4000, today it is back above 1.4400. This sharp move higher is down to two things: reports overnight that Germany will support further aid to Greece without first demanding a partial restructuring or burden sharing between taxpayers and private investors. The second thing is that the problems have maintained fairly well contained within Greece and have not spread to Spain.

This has fuelled the conditions necessary to see EURUSD aback above 1.4400; however we will need to see a convincing break above 1.4500 before we’ll be happy that another uptrend is in place. But signs that the sovereign issues are under control – or that a default has been avoided at least for now – seem to be cheering the market.

The economic data out of Europe this morning has also supported sentiment for the single currency. German retail sales expanded at a very healthy 3.6 per cent annual rate in April, French producer prices also remained elevated. Although the flash estimate of CPI showed a moderation of price pressures in May from 2.8 per cent to 2.7 per cent this is still above the ECB’s target for annual inflation growth of 2 per cent or just below.

The likely candidate to head the ECB after Trichet retires in October, Italian Mario Draghi, still sounded hawkish during a speech today. He said that inflation risks are rising and that the ECB will base future policy decisions on protecting price stability and not on fiscal concerns facing some member nations. Draghi was also explicit that economic weakness is no excuse not to exercise fiscal “control”, which suggests that the ECB don’t want member nations to back away from tough financing decisions because the global economy is going through a soft patch.

Although deficit reduction plans may aggravate growth in the region especially with signs that the economy is already passed its peak, this hasn’t dented investor optimism toward the euro. Partly this is due to the weak dollar, which hasn’t staged the rebound some anticipated. Amongst other news this morning was some high profile analysts cutting their target for Friday’s non-farm payrolls report.

Payrolls data on Friday is expected to show that the US economy created 185k jobs last month, but after weakness in some survey data recently and the latest regional manufacturing indices, the risks are to the downside. The unemployment rate is expected to narrow to 8.9 per cent from 9 per cent in April. However, this is still an extremely high number, especially given that QE2 ends in June.

Interest rate differentials are firmly in the euro’s favour, and if we break 1.4500 then we may see back towards 1.5000. However, next week the EU/IMF and ECB are due to report on how well Greece has been adhering to the conditions of bailout number one. Whispers in the market suggest the report will be damning, with Greece having reached none of the targets set for it this time last year, so there is a chance that sentiment could be dashed in the coming days.

Overall risky assets are moving higher along with a stronger EURUSD. The weakness of the greenback is also boosting commodity prices – Brent crude is above $116 per barrel. Gold is slightly more mixed as investors back away from safe haven assets. This has also weighed on the Swissie.

The yen has had a battering this morning. Firstly economic data was weak for April. The jobless rate edged higher to 4.7 per cent from 4.6 per cent in March, household spending also fell by a larger than forecast 3 per cent. This was to be expected in the aftermath of the earthquake on March 11, but spending may also have been affected by reports that the government may have to raise the consumption tax in order to reign in its huge public debt burden.

Japan’s fiscal concerns were highlighted yet again today when the credit rating agency Moody’s put Japan’s Aa2 sovereign debt rating on review for a downgrade. The agency said that faltering growth and a weak policy response by the government had prompted the move, and that without a proper strategy government debt would continue to surge when it is already at an unsustainably high 200 per cent of GDP. This weighed on the yen, and USDJPY is back above 81.50.

Elsewhere, Swiss GDP was weaker than expected for Q1, although the Swissie was weaker due to the return to risk appetite to the markets. But the GDP data puts in doubt an immediate rate hike from the SNB when it meets on June 16.

A reversal in fortunes is occurring in the southern hemisphere, with New Zealand’s economic prospects looking brighter than those for Australia. While Australia saw deterioration in net exports in Q1 and a weakening of its current account balance, New Zealand’s business confidence and outlook were much stronger in May than expected. This supported NZDUSD as it broke another record high above 0.8200.

Source: Forex.com

31.05.2011