Sagging GDP Slams Euro

The Euro is down nearly 1% this morning, which is a large move for the currency markets.

After trending gently higher for the first half of the week, the euro has been sold to new three week lows in response to the disappointing Q4 GDP figures. The GDP figures are of course backward looking and more recent data, such as the PMI figures and German factory orders suggest the regional economy is stabilizing here in early Q1.
There is a middle step to go from the GDP figures to the euro and that is the interest rate channel.  There has been some speculation that the passive tightening of the euro area financial conditions (including the shrinking of the ECB's balance sheet) and the strength of the euro would prompt the ECB to cut the refi rate later in Q1.  The poor GDP readings bolster such expectations and this can be seen in short-term interest rates.  The March Euribor futures contract is now implying 0.24% rate, having matched the lowest rate since Jan 23, or before the early repayment of LTRO I was announced.

Another way to see this is in the US-German 2-year interest rate differential, which continues to track the euro-dollar exchange rate.    Recall the sequence of events.  In early Dec 12, the US was offering about 32 bp more than Germany on 2-year obligations. By late January, the US was at a  2 bp discount.  However, this month it has been trending back toward the US and today, at 8 bp, the US premium is the largest since mid-Jan.  
The euro's drop today indicates the downside correction to the euro began earlier this month is not complete.  A break of $1.3310 signals a potentially quick move toward $1.3270.    Sterling's slide has been extended and it briefly dipped below $1.55 for the first time since August.  The unwinding of long euro-sterling positions is helping sterling steady against the greenback.
The day of disappointment actually began in Asia, where Japan reported a 0.1% contraction in Q4 GDP.  The consensus had called for a small increase.  It is the third consecutive quarterly contraction.  Exports, which fell for seven months through Dec was an obvious drag and business investment was also a drag.  The BOJ concluded its two day meeting, leaving policy unchanged.  It assessment was tweaked higher as it recognized that the "economy appears to have stopped weakening".   The yen is largely sidelined today as the dollar continues to consoldiate within Monday's range.
Fro the first time in more than a week, a Japanese official cited specific dollar-yen rates.  Iwata, who is thought to be vying for the BOJ governor position, suggested the JPY95 area was appropriate.  He opined that a correction of the yen's strength is vital to achieving the 2% inflation target and was sympathetic to changing the BOJ charter.  He has also been an advocate of foreign bond purchases.  While his comments may play well in Japan, they probably are not helpful in securing international standing, which was also a criteria cited by senior government officials. 
Some press reports are playing up comments by the Riksbank governor yesterday that seemed to accept the krona's strength and suggesting Sweden entering the "currency war" on the other side.  This seems to be an exaggeration. First, this is essentially what Weidmann and Draghi have said about the euro.  It is near long-term averages.  That means that the current rate is acceptable.  Second, about 7 months ago when the euro was at $1.20, the US did not complain about the dollar's strength. 
In fact, outside of one Fed official expressing some misgivings about what Japanese officials were saying about the yen, and Treasury Secretary designate Lew endorses of a strong dollar policy, the US has been as usual quiet about the exchange rate.   Easing monetary policy when one's inflation is low and the output gap is large is not a shot in currency war.
The euro zone area GDP contacted by 0.6% in Q4.  The market expected a 0.4% contraction.   Most countries, including Germany, France and Italy's contractions were more than expected.  Canada looks to be fastest growing in the G7 at the end of last year.  A combination of construction spending, retail sales, trade figures and the latest inventory data suggest that the contraction in Q4 US GDP may be revised to show a small uptick.  The revision is due Feb 28.

As Markets Become Unravelled

from m3 Financial Analysis blog:

The markets are dissolving…they are TOTALLY disconnecting due to the stresses caused by deleveraging…IT IS NOT PRETTY and it is totally the result of central economic planning…what a mess. A major disconnection around these corners awaits.

For more information regarding what the EURODOLLAR contract is: click here

Posted by pc at 1:46 PM

Stocks Tank, Euro Too!

No certain news as to why. I think it may be a reversal at resistance. Euro is tanking too!

Stocks

Euro

Commodities Plunge on Euro Worries, Strength of Dollar

More Euroland Turmoil

Dollar Goes Ballistic on Europe's Woes

Euro plunging!

Euro Digs Itself Out of Deep Hole

Stocks, Euro Gap Down, Then Tilt Higher

The weekend hasn't resolved or assuaged the worries, especially in the Eurozone. Remarkable congruity in these two charts!

Stock futures

Euro futures

Euro Battered On News of France Debt Downgrade

Euro

Dollar

Europe on the Brink!

How bizarre that the Euro is modestly stronger!

from Britain's Daily Mail:
Fears are growing this weekend that two of Europe’s largest banks may require a bailout, having been hugely damaged by the worsening crisis across the eurozone.
In France, President Nicolas Sarkozy is having to confront the possibility that the country’s second-biggest bank, Societe Generale -commonly known as SocGen - is on the brink of disaster after huge losses over loans made to Greece.
The chilling possibility of the largest bank in Italy, UniCredit Banca, suffering a similar collapse if a bailout is not implemented comes as Silvio Berlusconi already faces an increasingly dangerous national economic situation...
The merest hint a major bank might fall is likely to reignite panic tomorrow in the stock market, which is already feared to react badly to the credit downgrade of the U.S. by rating agency Standard & Poor’s...
Experts fear that if any single bank is seen to be in trouble, all lending could freeze up in the resultant climate of fear, with devastating consequences. 

Greek Vote Brings Market Mayhem

When one key Socialist Party deputy voted against the bailout package, the Euro plunged, but only for a minute. They kicked that deputy out! Can kicked -- again!

Go Figure! Euro Strengthens on Greek Debt Downgrade

Fitch Downgrades Greek Debt

Euro clobbered! Dollar recovers:

by Axel Merk at FT.com:



Imagine a country that spends and prints trillions to patch up any problem.

Now imagine another country where there is no central Treasury, meaning that bail-outs are less easy, and which has a central bank that has mopped up liquidity over the past year, rather than engage in quantitative easing.

Why does it surprise anyone that the latter, the eurozone, has a stronger currency than the former, the US? Because of peripheral countries’ debt refinancing issues? And the potential for contagion? These are real and serious issues, but in our assessment, they should be primarily priced into the spreads of eurozone bonds, not the euro itself.

Think of it this way: in the US, Federal Reserve chairman Ben Bernanke has testified that going off the gold standard during the Great Depression helped the US recover faster than other countries. Fast-forward to today: we believe Bernanke embraces a weaker currency as a monetary policy tool to help address the current state of the US economy. What many overlook is that someone must be on the other side of that trade: today it is the eurozone, which is experiencing a strong currency, despite the many challenges in the 17-nation bloc.

A year ago, the euro appeared to be the only asset traded as a hedge against, or to profit from, all things wrong in the eurozone. This was partly driven by liquidity, because it is easier to sell the euro than to short debt of peripheral eurozone countries; and as the trade worked, others piled in. As the euro approached lows of $1.18 against the dollar, the trade was no longer a “safe” one-way bet and traders had to look elsewhere. As a result, the euro is now substantially stronger, yet peripheral bond debt is much weaker.

The one language policymakers understand is that of the bond market. A “wonderful dialogue” has been playing out, encouraging policymakers to engage in real reform. Often minority governments have made extremely tough decisions. Ultimately, it us up to each country to implement their respective reforms; political realities will cause many to fall short of promises, resulting in more bond market “encouragement”. Policymakers hate this dialogue, of course, but must respect it.

Any country may default on its debt. The problem is that it may be impossible to receive another loan, at least at palatable financing costs. Any country considering a default must be willing and able to absorb the consequences, which is an overnight eradication of the primary deficit.

That’s why it is in Greece’s interest to postpone any debt restructuring until more reform has been implemented.

The risk/reward consideration of a default is likely to be more favourable a few years from now. The banking system has already had time to prepare for a Greek default, among others, unloading securities to the European Central Bank. Politics may cause an earlier default, but Greece would be shooting itself in the foot, as an important incentive for further reform through the carrot and stick approach of the European Union and International Monetary Fund is taken away. Moreover, why refuse the easy money?

Debt reduction in principle is certainly possible. Belgium in the 1990s had a debt to gross domestic product ratio of about 130 per cent and has since taken it down to about 98 per cent. The Belgium caretaker government appears easily capable of continuing the country’s prudent fiscal path.

Portugal’s main challenge is that it is a small country with a weak government, but it is capable of living up to its commitments.

Spain is a major country that has had a housing bust – nothing new in modern history. Given Spain’s low total debt to GDP and an assertive approach to overhauling its banking system, we sometimes compare Spain to Finland. In the early 1990s, Finland had a housing bust, as trade with the Soviet Union ended, followed by a banking system implosion and soaring unemployment. Both Finland then and Spain now have low debt-to-GDP ratios. It may be easier to implement reform in Finland (and Finland had a free-floating currency), but Spain has a real economy and ample resources.

Ireland is trickier, because a default may be an attractive political consideration. However, we would be more concerned about fallout to sterling, given the exposure of the British banking system, than the euro.

In the US, the day investors come to accept the reality that inflation, rather than fiscal discipline, is the path of least political resistance may be the day the bond market won’t be as forgiving. Unlike the eurozone, where consumers stopped spending and started saving a decade ago, the highly indebted US consumer may not be able to stomach higher interest rates. The large US current account deficit also makes the dollar more vulnerable to a misbehaving bond market than the eurozone.

In the medium term, we are far more concerned about risks to the US dollar than those posed by the Greek drama to the euro.

Axel Merk is president and chief investment officer of Merk Investments

Dollar Skyrockets, Euro Gets Beaten Down

Dollar

Euro

Markets Rocked, Terrible Turmoil

Jobless claims rose for one of the largest disappointments to consensus in memory. Stocks taking a hit, despite that Goldman is trying to makes excuses and brush this miss aside. If it is all due to "seasonal adjustments", then why didn't the consensus take that into account also? And ECB President Trichet is sounding dovish, sending the Dollar higher and Euro plunging. Meanwhile, the True Finns party, who just took power, is saying that Greece must default and is refusing any more bailout to the EU.

Results:

Dollar -- much higher
Euro -- much lower
Stocks -- moderately lower

Crude oil -- significantly lower
Commodity -- significantly lower
Gold and silver -- significantly lower

Also: commodity margins have been raised by exchanges over and over again over the past few weeks and months. Silver has been raised four times in less than two weeks. One silver contract on May 9th will require a margin of about $38,000 -- for ONE contract!

Citi Statement on USD Impact of Today's Bernanke Presser

 Shout out to Zero Hedge for this:

Statement by Citi:
Today's FOMC meeting breaks new ground with the formal FOMC policy decision and statement at 12:30 followed by the Bernanke press conference at 14:15. Our economists expect that the Fed: "will complete the purchases of Treasury securities by the end of June … trim growth forecasts and raise projected inflation estimates slightly. …. a key goal of the Chairman may be to reassure the public that rising energy and commodity prices will not prove the leading edge of a persistent surge in inflation. …the Committee is not expected to alter its rate guidance or tinker with reinvestment of MBS principal repayments."
There is expected to be no enthusiasm for QE3 and no commitment on what will be done with maturing securities. This is pretty much what is priced into the market.
The somewhat more elaborate FOMC statement (vis-à-vis say the ECB policy rate announcement) and the 1 3/4 hour gap between statement and press conference may lead to somewhat more active FX price action in the interim. However, as investors have discovered with the ECB press conference, the answer to many questions may be "I have nothing to add beyond what I have already said" so those who expect a catharsis may be disappointed.
The potential USD negative surprise:
1) focus on the disappointing performance of the US economy, the downward pressure on real wages and weak levels of core inflation
2) reiteration of the view that global imbalances and inflation reflect misguided currency policies in EM
3) opening a door to QE3 if the outlook disappoints further
The potential for USD positive surprises:
1) a hard line on the fiscal situation and strong commitment to opposing any further monetization of the debt
2) any substantive concern that  commodity price increases may persist  and lead to second round inflation
3) concern on upward drift in long-term inflation expectations
4) any hint that the Fed is beginning to focus on tightening as the most likely next significant policy move
5) repetition of Treasury Secretary Geithner's strong dollar declaration (although as with the Treasury Secretary's declaration, the impact is likely to be limited at this stage).
Our CitiFX PAIN reading for EUR positioning is now at 65.82, pointing to the longest EUR positioning since early December 2010. US 2-yr yields are close to the bottom of the February-April range so it is hard to argue that investors expect anything but a somewhat dovish approach. Nevertheless, unless there is a real signal that some turn in policy is approaching, any USD buying is likely to be temporary.

Euro, Stocks Decline on Fresh Sovereign Debt Worries

The Finns yesterday voted in a new parliament that is expected to refuse to back Portugal's plea for a bailout. New cracks in the foundation of EU unity. It always amazes me that what has the greatest impact on the news is often obscure stories in obscure places. I have learned to expect the unexpected! One of the rules of trading is that anything can happen!

Stocks

 Euro

Dollar Explodes Back Above 75

 From Marketwatch:
Early results Sunday from Finland’s parliamentary elections suggest the anti-EU bailout True Finns party will hold the second-most number of seats and could even be part of a coalition government. Such an outcome may mean the EU’s planned bailout of Portugal is vetoed by Finland, a move that would roil the euro-zone markets. With half the votes counted the True Finns were on 19% support, and on course for 41 seats, tied with the Social Democrats and one seat less than National Coalition Party’s predicted 42-seat haul, the BBC reported. Finland is the only euro-zone country that requires bailouts to be approved by its parliament. Strong gains by the True Finns could derail a planned rescue for Portugal."

Euro -- the anti-Dollar

Dollar Recovers Following Fed Governor Plosser's Comments

FXstreet.com (Buenos Aires) – EUR/USD lost over 70 pips in a few minutes, following FED’s Plosser hawkish comments, signaling an economic policy reversal. The common currency has been under pressure most of the week, as after reaching a fresh yearly high at 1.4250, profit taking along with Portugal debt woes had been pushing the cross to the downside.

Quoting right now around 1.4080, pair faces immediate support at the weekly low set at 1.4053, followed later by 1.4000 psychological level. However and despite recent losses, bullish trend remains intact, according to Valeria Bednarik, Fxstreet.com chief analyst, as long as above 1.3950 price zone.