• Euro Traders Encouraged by EU Decision to Help Greece, Anxious Over the Lack of Details
• Australian Dollar and New Zealand Dollar Interest Rate Forecasts Diverge Further Following Data
Dollar Rallies on Vague European Bailout Plans, Stalls after Risk Appetite Resumes its Climb
The broader market kept its focus on the progress on the Greek rescue effort; and therefore, dollar traders would keep up to date on European affairs. The top headline this morning was news that the European Union had drawn up a preliminary agreement among its members to help the financially strained economy avoid a default. However, the relief this critical step would allow for an otherwise anxious global market was offset by the clear lack of a formal plan. The reason Greece’s financial troubles have become the primary fundamental driver for most liquid securities is not related to the economy’s actual influence on the global market. Rather, the threat of default from a member of one of world’s largest economic and financial players threatens another crisis that could send credit and capital markets reeling. The trouble that Greece is facing is just the tip of the iceberg. Spain, Portugal, Ireland and Italy among others are struggling to establish growth and/or rein in deficits. Falling short on the current focus of the market would cause a domino effect in casting doubt over the stability of the entire Euro Zone. Ultimately though, it is investor sentiment that is intensifying problems in Europe and not the other way around. It is very likely that the offender countries that have run beyond the deficit limits of the EU can work their debts given reasonable market conditions; but a global effort to withdrawal the stimulus that leveraged markets to their current levels and rising financing costs are leading market participants to reevaluate where their capital is placed. What’s more, fear is contagious; and there are many cracks in the world’s financial system. Should the focus swing to the United States’ fiscal responsibilities, the onset of long-tem deflation on Japan or the potential collapse of an asset bubble in China; the stakes will grow.
Turning our attentions back to the US, traders were expecting a little more activity from the docket Thursday. However, with Washington DC still shut down by the crippling blizzards that have struck this past week, the government was forced to delay the release of the retail sales and business inventory figures. This turn of events actually helps to concentrate the potential for volatility through the final day of trading for the week. With the University of Michigan Consumer Confidence index set for release shortly after the spending report, there is a good chance that the data will align for a significant shift in the dollar. How far could the greenback move on this fundamental track considering the current fixation on risk appetite? That is difficult to say. Yet, with the EU not expected to offer any details to its bailout until next week and given the US currency is not vying for a place higher up on the risk spectrum (as the interest rate and growth outlook certainly put it in competition with most of its counterparts), there is a good chance for a short-term volatility response. In meantime, Fed Chairman Ben Bernanke’s House Financial Services Committee remarks are still resonating for those looking beyond the short-term influences of risk appetite. The highlight from the commentary was the suggestion that the discount rate could be raised ‘before long.” This is a definitive step towards tightening monetary policy and eventually hiking the Fed Funds rate. However, there will be plenty of changes aimed at extracting stimulus before this final step is taken. Turning the focus on the interest charged on excess reserves for instance can swell real market rates just as readily as the typical benchmark. Another step that found greater speculation today was the possibility of stepping up reverse repurchasing (repo) agreements in an effort to drain the market of excess liquidity that encouraging inflation and excess leverage. Sources suggest the policy authority is attempting to establish connections to the $3.2 trillion money market mutual fund space. When this will be ready is a matter of debate; but in the meantime, Credit Suisse overnight index swaps are pricing in 71 basis points of hikes from the central bank over the coming 12 months while Fed Fund futures show a 52 percent chance of a quarter-point hike in August and nearly 80 percent probability of at least 25 bps by November.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Bolstered by Carry Unwinding and the Specter of Rate Hikes
Euro Traders Encouraged by EU Decision to Help Greece, Anxious Over the Lack of Details
An accord has been struck. After a summit in Brussels, the officials from the European Union agreed to provide Greece with support in order to stave off disaster. Yet, whether the group will be successful is still a matter of speculation. While the fundamental hurdle of committing to support the struggling economy has been answered; the means for providing this assistance have yet to be hashed out. Luxembourg Prime Minister Jean-Claude Juncker said the exact nature of the bailout would be decided next week; but he would also repeat his opinion that Greece’s commitments were “strong enough” on their own. The same general sentiments were echoed by German Chancellor Angela Merkel who said that the troubled nation wasn’t seeking funds and suggested credibility was essentially in calming fears surrounding the economy. It is true that this particularly situation is a crisis of confidence rather than a true financial emergency. However, officials’ blame of a ‘speculative attack’ is perhaps overboard. Speculators will certainly draw their capital from this fundamentally weak economy and require higher returns in holding the nation’s debt; but that is in an effort to protect capital rather than profit from an economic fissure. In the end, a bailout may not even solve the EU’s troubles. Fear can quickly become contagious and the moral hazard a direct rescue invites can swamp the group. This is certainly more in the hands of the market than it is policy officials.
Looking ahead to tomorrow, euro traders will take a break of sorts from keeping a constant vigilance on the moment-to-month developments with Greece, Spain and Portugal. The first readings of 4Q GDP are expected for Italy, France, Germany and the Euro Zone. While the pace of contraction on the annual figures is expected to improve across the board, the quarterly changes are expected to come to a significant downgrade. With deficit troubles bearing the focus of the market on the Euro Zone, this tangible data could exact significant damage to the euro.
Related: Discuss the Euro in the DailyFX Forum, Watch the Euro Zone GDP Release Live with David Song
Australian Dollar and New Zealand Dollar Interest Rate Forecasts Diverge Further Following Data
The Australian and New Zealand dollars have taken very different paths over the past 24 hours. Following the surprise 52,700-person jump in net payrolls and a drop to an 11-month low for the unemployment rate, the recently depressed interest rate outlook for the Aussie dollar has improved dramatically. This was perhaps the most consistent and commanding economic release the currency market has seen in weeks with a prominent follow through from the currency. In contrast, the interest rate outlook for the kiwi dollar has dropped to a four-month low after a key housing-based inflation indicator turned negative and retail sales excluding autos reported its biggest drop on record for December.
Related: Discuss the Australian Dollar and New Zealand Dollar in the DailyFX Forum
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: <[email protected]> [/I]