Greek bailout is a Euro bailout, but, for how long?

Forced to eat ‘humble pie’ and commit to their future, the EU has stepped up to the plate and pledged debt-burdened Greece a rescue package at below-market interest rates as they try to end this member fiscal crisis and restore confidence in the ailing EUR. The Fitch downgrading last week certainly sped up this rescue process. The EU maneuver has eaten into the -5.7% currency depreciation year-to-date with the ‘buck’. Greece was offered 30b euro’s in 3-year loans at 5%, which is less than the current 3-year Greek yield of 6.98%. Another 15b would come from the IMF. Much will depend on Greece’s ability to raise their ‘own’ capital this week on the open market. With the EU backing making the process more palatable for investors, any struggle in raising the required 1.2b euros will again question investor confidence in the country’s ability to repay its debts and pressurize the EUR.

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘volatile’ trading range.

It was only to be expected that the EUR would gather strength after an official EU aid package was presented. As various analysts have pointed out, this Greek bailout really is a Euro bailout, at least for the short term. We all know that the key ingredient for the EUR weakness, a potential default of Greece, and the EU finance minister’s actions over the weekend has temporarily averted this ‘chaos’. Given that the market is short EUR’s and the various crosses, what price actions we have witnessed makes perfect sense. However, now that weaker members will also have to ‘shoulder the potential burden’, this new found trend is questionable. Will the EU support continue to keep pushing Greece to solve its own legacy problems? Investors do not want the symptoms to be just treated.

The USD$ is lower against the EUR +0.11%, GBP +0.12% and higher against CHF -0.19 % and JPY -0.44%. The commodity currencies are weaker this morning, CAD -0.47% and AUD -0.80%. Despite not meeting consensus for the Canadian employment report on Friday (+17.9k vs. +25k), the upward trend remains somewhat unflappable for a third-consecutive monthly gain. The unemployment rate remained at +8.2%. Digging deeper, full-time employment actually fell by -14.2k while part-time jobs gained by +32.2k. The number of employees increased by +21.9k and self-employment fell by -4k. Interestingly, the average hourly wage growth slowed to -2.2%, y/y. The loonie again is staring at a ‘premium’ to its southern neighbor. Commodities, equities and every piece of economic data cannot trip up the currency’s momentum presently. Year-to-date the loonie has appreciated just over +5% vs. the greenback, making it the second strongest currency move after the MXN. Everything the global economies want, Canada has it. Now that the EU has acted, risk premium is being priced out and should benefit growth currencies. With Canadian growth rates coming in stronger than Governor Carney and his policy makers expected, has futures traders pricing in a rate hike sooner than official rhetoric is suggesting. USD rallies remain shallow and are met with strong resistance. The trend remains your friend.

The AUD was the second worst performer amongst the 16-most traded currencies last night. It fell in the O/N session, erasing earlier gains, as a government report showed the housing market may weaken even further. Home-loan approvals fell more than Capital Markets expected (-1.8% vs. -1%), signaling that the Governor Stevens five rate hikes (4.50%) may be curbing demand. The market should expect short term sentiment to remain somewhat negative until the interest rate date filtrates through the consumer confidence reports. Bigger picture, fundamental data is very strong and the RBA still require a gradual tightening process to bring borrowing costs ‘closer to average’. Analysts expect the Cbank to raise their policy rate up to +5.0% in the 1st Q of next year. This will only further boost the currency’s reputation and speculator buying on dips is expected to dominate. Governor Stevens said that ‘it was a further step in returning yields to average levels’. Last week’s Cbank communiqué said that ‘interest rates to most borrowers nonetheless have been somewhat lower than average’, and ‘with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average’. The market should expect the AUD to remain better bid on any pull backs (0.9292).

Crude is higher in the O/N session ($85.40 up +48c). Crude and gas were pressurized Friday on speculation that US stockpiles of the fuel will surge as refineries bolster processing rates. Commodities this morning, by default, have found support from the ‘buck’ backing off. Last week’s EIA report revealed that US plants operated at +84.5% of capacity (the highest level in 6-months). At one point, oil managed to print an 18-month intraday high following reports that showed growth in US and service industries. Speculators expect economic growth will continue and demand is going to increase, however, inventory levels are still robust. If global demand does not pick up, then technically, the commodity is going to find it difficult to maintain traction. Last week supplies of crude rose +1.98m barrels to +356.2m, pushing inventories +7.1% higher than the 5-year average. It was the 10th- consecutive gain, the longest stretch of weekly increases in 6-years. In reality, commodity gains are a crowded trade. Investors should heed the warning signs, a weak dollar, robust equity prices and little demand for the ‘black-stuff’, is certainly a recipe for backwardation and making it difficult for technical analysts to achieve a $90 print in the short term.

The yellow metal surged again on Friday, reaching a 4-month high, as investors sought sanctuary in the commodity as an alternative to holding currencies. Again this morning the commodity remains robust as the dollar wilts. The market had expected some profit taking after the announcement of an affordable EU loan extension to Greece at the weekend. All month, stronger fundamentals have given commodities a boost and adding an insurance premium gave further support. Now that some of the unknown variable may be taken out, investors again will want to take profit and add some risk to their portfolios. Global equities are expected to push higher as economic reports exceed most analysts’ expectations. Speculators are itching to take cash off the side lines and put it to work. Gold has been used as a conduit for a currency of choice. Up until this weekend Greece has been the unknown variable, downgrades and fear of defaults had investors seeking an alternative to an ‘on going weakening’ of the EUR and low interest rates. It will be interesting to see how the market reacts to the EU announcement. Are there still fears of contagion spreading amongst the weaker member states in the EU? ($1,164)

The Nikkei closed at 11,251 up +48. The DAX index in Europe was at 6,260 up +11; the FTSE (UK) currently is 5,776 up +6. The early call for the open of key US indices is higher. The US 10-year eased 2bp on Friday (3.88%) and has backed up 3bp in the O/N session (3.91%). Last week Treasury prices rose after 10-year product encroached on 4%, attracting demand for the $21b worth of new benchmark offered by the US government. The short end of the curve garnered support from Bernanke’s comments that ‘joblessness, foreclosures and weak lending are dragging on the recovery’. With $82b’s worth of total issues up for grabs, it was only natural for traders to cheapen the curve to increase its attractiveness. Now that the EU has shown its hand this weekend with respect to Greece’s loans, how much of the insurance premium will be priced out of Government bonds? US futures show that there is a +71% chance that the Fed will keep the target lending rate unchanged through Aug., up from a +58% chance a month ago.

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