EU’s Greece is ‘too big to fail’

Everything is well contained in Europe I see, not. For consumers, it’s the interest that will always kill you. Interestingly, Spanish developers had a combined debt of EUR324b in the third-quarter of last year. That’s a whopping 30% of Spanish GDP. The interest bill alone is an annual EUR15b, which developers cannot hope to pay. Technically, their real estate sector is bankrupt. Naturally, the trickle down effect will have astronomical implications for the Spanish banking sector and their economy as a whole, and we think Greece has problems. Later this morning, the EU is expected to endorse the Greek budget program and will probably make recommendations for further fiscal action. Greece has four months to show the progress it is making, by then we should be moving on to another member of PIIGS.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

Yesterday’s US pending home sales was little changed (+1% vs. +0.4%) after last months -16% record plunge print. In reality, a new tax credit initiative will take time to filter down through the system and revive sales. The small monthly rise suggests ‘existing’ home sales were flat to weaker in Jan. Notably, this time last year the pending sales index advanced +11%. The market expects the renewal and expansion of the initiative to eventually aid future sales and ease the pressure of record foreclosures. In time, mortgage rates will have to back up as the Fed exits the market directly. On the face of it there is still no ‘strong’ evidence of a significant rebound in home-sales just yet.

Surprisingly strong US data this week is ‘sneakily’ giving the thumbs up to risk acceptance again. This morning’s ISM Non-Manufacturing PMI will be highly scrutinized to see if the inventory led rebound in 4th Q GDP report is filtering into the larger service sector. If so, and coupled with a positive print with the NFP report on Friday, will give investors the green light to own risk positions with confidence again. They are even getting support from the reversal of fortune of commodities.

The USD$ is currently lower against the EUR +0.29%, GBP +0.45%, CHF +0.25% and JPY +0.27%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.42%. The loonie remains range bound despite global equity indices and specifically commodity prices pushing higher. With lack of participation interest in yesterday’s session has dealers sitting on their hands for Friday’s employment results. The Canadian government, again, revised this year’s GDP projections from +2.3% to +2.6%. The currency hardly got any mileage after the official announcement. Last month, the CAD gave up -1.6% to its larger southern brethren. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750-75 near term. This week’s North American employment reports, could by default, renew USD support and temporarily derail the loonies’ strength.

The AUD has clawed it way back from a six week low, however, the bigger picture remains under pressure as the market continues to absorb the RBA’s surprise no action with rates earlier this week. It seems that Governor Stevens is waiting for the rest of the world to catch up after their three consecutive hikes since Sept. Earlier this week the RBA flatfooted most of the market by keeping borrowing costs on hold at 3.75%. Currently, there is a lofty rate premium built into the AUD after the successive hikes. Analysts now expect the currency to trade back down to the 0.8500 level over the next one to three months. Lets see how the growth currencies absorb Greece’s budget proposals and NFP numbers this Friday.

Crude is higher in the O/N session ($77.77 up +54c). Crude, for the time being, remains better bid on a weaker dollar and on stronger global economic headline prints. Speculators believe this will eventually increase fuel consumption amongst the world’s biggest energy-consuming countries. It seems that market consensus is now firmly leaning towards a softer EIA report later this morning. Up to now, US demand has been rather weak and inventories have been falling only because of low import numbers, not because of strength in demand. Stronger manufacturing numbers this week is fueling higher prices. Continued geo-political concerns in the Nigerian delta are also adding support to the market. Any militia tension in an oil-rich region will only ever support global prices. Even the National weather forecast is giving the commodity a helping hand and predicting below normal temperatures for next week along the east coast of North America. Last week’s EIA report showed that gas inventories rose to a 22-month high proving that demand destruction is out there. Crude, on the other hand, dropped -3.89m to +326.7m vs. an expected rise of only +1.5m barrels. Technically, the crude print was the only bullish component of the report. Refineries ran at 78.5%of capacity, little changed from the previous reading of 78.4%. Let’s see what dealers have in store for us after 10.30am this morning.

Gold prices know no boundaries. Just when you thought it would be ‘safer’ to get out of the water, gold has recaptured some of its luster after falling to yearly lows last week. For a second consecutive day, the yellow metal has found support as the dollar threatens to lose short term faith with investors. Gold bulls seem to breathing a tad easier after last month’s bloodshed. Technically the commodity was in oversold territory. The budget numbers that Obama’s administration is quoting has speculators seeking hard assets like gold and oil. Various sources believe that the commodity remains under pressure as a stronger dollar this quarter will curb the commodities appeal as an alternative investment. They do not believe that the commodity downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR questionable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,121).

The Nikkei closed at 10,404 up +33. The DAX index in Europe was at 5,728 up +19; the FTSE (UK) currently is 5,303 up +20. The early call for the open of key US indices is higher. The US 10-year note eased 1bpyesterday (3.61%) and are little changed in the O/N session. Yesterday bonds found support on the Japanese Office rumor that they need to diversify their portfolio. Currently 80% of their funds go towards buying JGB’s, and the market is speculating that future investments will go towards corporate bonds and US Treasuries. Apart from that, the market is focused on economic releases later in the week and the treasury supply announcements this morning (3’s, 10’s and 30’s for next week). Dealers continue to be better sellers on upticks to absorb future supply.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell