Articles from January 2012

Germany forces euro union

Europe took a major step towards greater fiscal integration overnight, as all EU members except the UK and Czech Republic agreed to German measures to reduce budget deficits and allow greater oversight by the European commission. Germany forces euro unionThe pact should be in place by March with the ratification and implementation to follow shortly after.

Automatic fines of around 0.1% of GDP will be levied on countries who fail to reduce their deficits by the agreed proportions.

The fines smack of a token gesture given it will be one of the PIIGS that fail the tests and clearly they would not be expected to pay, and the fact that the Maastricht treaty imposed broadly similar rules which were blatantly broken by all member states is one of the reasons Europe finds itself in its current state of woe.

As with recent EU meetings, the news will likely trigger a short lived Euro bounce before selling pressure resumes.

Sterling continues to climb against the Dollar driven by the recent surge in the value of the Euro against the Dollar.

Apart from PMI figures, there is little by the way of meaningful UK data out this week to move Sterling so expect it to stay in lockstep with the Euro-Dollar.

Expectations for the PMI data is expected to show a mixed bag, but given the GDP reading earlier in the week there is more chance of disappointing readings than surprises to the upside and that should translate into Sterling weakness.

US data due today and for the rest of the week include personal consumption expenditure which is expected to show a slight increase and ISM manufacturing on Friday is also expected to show a positive reading.

Over recent weeks we have been seeing an about turn in the way the Dollar reacts to positive US data. Over the past few years the risk-on, risk-off theme has been the dominant driver of Dollar movements where good US data was seen as risk-on and the Dollar fell.

Recently we are seeing a reversal in the theme, and positive US data is increasingly leading to the US Dollar strengthening.

Currency converters ponder euro/ dollar exchange rates

Since the beginning of the year EUR/USD has gained around 4%. Currency converters ponder euro/ dollar exchange ratesThe pair is trying to sustain a level above 1.3200 but struggled during Asia trading.

The euro rally is largely attributed to short positions hit an all time high for last week.

However, headline data is unlikely to provide much force to the Euro, with monthly series of PMI manufacturing confidence indices as consumer confidence readings will be under the spot light.

Realistically the figures will demonstrate some stability but investors will centre attention on the EU Summit beginning today and continuing Greek debt talks in addition to Italian debt auctions today.

Greek debt talks are likely to be confirmed this week including write downs of around 70% but nervousness over a German proposal to create a “budget commissioner” could be detrimental to the Euro.

Under the spot light in the UK this week is the January PMI  manufacturing survey however there will also be interest on housing data including mortgage approvals and house price surveys from the Nationwide and Halifax.

In general the data will do little to dismiss fears about the UK economy following the contraction in Q4 GDP announced last week.

The Pound looks to remain sturdy against a backdrop of poor economic news however, but its gains look limited especially given the disclosure in the BoE MPC minutes that some members thought that additional QE will be required.

Having strengthened against the Greenback but weakened against the Euro over recent days, GBP continues to trade in a middle of the road manner.

Cable sellers will likely emerge around the 1.5870 resistance level while EUR/GBP is set to consolidate around 0.8350.

FED to keep interest rates low until 2014

The US FED Reserve’s minutes from the meeting earlier this month were released yesterday evening and after several months of treading water the Fed decided to change its wording on interest rates. FED to keep interest rates low until 2014The Fed now plans to keep rates at extraordinary low levels until the end of 2014, which is a year further than their previous stance and signals to the markets that the Fed will continue to provide a huge amount of monetary support even as the economy is recovering.

The consensus was that the Fed would begin to withdraw support once they thought the economic recovery had gained traction but yesterday’s announcement has realigned the market view to expect low interest rates for a long time to come.

The immediate reaction in the markets was positive with stock markets rising and a large move in the EUR/USD pair from 1.29 to over 1.31, which given the size of the move we can expect slight retrace back towards the 1.30 level during today.

On this side of the pond, the UK economy contracted by 0.2% in the previous quarter, which was slightly more than the consensus estimate of -0.1% but not large enough to overly worry the markets given than ONS regularly adjusts initial GBP readings by over 0.1%.

In the lead up to the announcement Sterling was sold off across the board quite heavily but once the data was announced we saw a broad recovery in Sterling throughout yesterday.

The Bank of England minutes gave no more clues about when further QE might be launched, the Governor did a good job in the proceeding days to forewarn the market that QE is still on the table without specifying exactly when it might start.

Positive German business climate data was the main driver of the currency markets yesterday morning but the rally ran out of steam once the US opened and focus turned to the impending release of the Fed minutes.

Wise Money transfers your currency out of eurozone

German Chancellor Angela Merkel told Davos-“We need a big rethink”.Wise Money transfers your currency out of eurozoneGermany’s Chancellor Angela Merkel has told the World Economic Forum that a “big rethink” is needed in the eurozone within the global economy.

“Structural reforms that lead to more jobs are essential,” she told delegates at the Swiss resort of Davos. “Do we dare to be more European?”

The eurozone is still struggling with a sovereign debt crisis and is trying to agree reform to its political system.

But many want Germany and other nations to boost the size of their rescue fund.

The International Monetary Fund (IMF) wants the eurozone to inject more cash into its rescue fund.

The IMF wants the sum available for bailouts to grow beyond 500bn euros (£416 billion) to ensure talks between private creditors and Greece do not grind to a halt.

The situation is urgent according to the IMF, which recently predicted that the economic growth rate in Europe could halve this year from an earlier estimate of 3.3% if the eurozone crisis remains unsolved.
Lessons learnt

Mrs Merkel disagrees with Ms Lagarde about what is needed.

“We have said right from the start that we want to stand up for the euro, but what we don’t want is a situation where we are forced to promise something that we will not be able to fulfil,” she said.

Mrs Merkel said that the austerity reforms being enacted – currently being felt from the Irish Republic to Italy – had to be balanced with reforms of how Europe is governed.

Mrs Merkel also acknowledged “tensions” between countries that have adopted the euro and those that have not inside the European Union (EU).

Given that the main euro paymasters Germany- and the IMF disagree on how to solve the euro credit crunch- there is only one way this story is going to go.

If you want to transfer your currency out of the eurozone, you can do so with our competitive currency converter service, please just click here now.

Money markets down as Greece debt talks falter

Money markets have fallen as eurozone finance ministers continue to force Greece’s private creditors to accept a lower interest rate on their loans to Athens.
Money markets down as Greece debt talks falterUK and French share indexes closed lower on Tuesday, while Wall Street fell on opening.

Euro ministers said creditors must take less than the 4% they had offered and urged both sides to reach a deal this week.

A deal is necessary for Greece to receive the bailout funds it needs. Without the funds, Athens will not be able to make billions of euros of loan repayments due on March 20th.

The FTSE 100 index in London closed down 0.5%, while the Cac 40 in Paris fell 0.3%, but the Dax in Frankfurt reversed earlier losses to close slightly up by the end of trading, gaining 0.4%.

The Dow Jones Industrial Average in New York was down 0.3% in morning trading.

Ministers confirmed that 130 billion euros (£108 billion) was available for the country, but also called on Greece to accelerate structural reforms to strengthen its economy before funds would be released.

However, Charles Dallara, head of the Institute of International Finance (IIF), which is representing Greece’s private creditors in negotiations with Athens, warned Europe was putting a “decade of progress at risk” over the management of the talks.

He added the 4% figure was a firm statement of their intent. He said: “Our offer is on the table and our position is clear.”

He added Europe must keep the support of the private sector, given the massive amounts of debt that have to be refinanced from France to Portugal.

He added that there was not a country that did not need investment from the private sector.

“Investors need to feel confident in their investments in sovereign debt,” he said.  “There are a lot of issues that remain unresolved, and I’m not entirely sure the path to resolve them is truly framed”

The finance ministers, headed by Luxembourg’s Prime Minister Jean-Claude Juncker, said they welcomed progress made in the talks between Athens and its private creditors, but called for an agreement “in the next few days”.

Mr Juncker also made clear that ministers backed Greece over the rate of interest it should pay on new bonds that will replace existing bonds held by creditors.

Ministers reiterated that a deal with private creditors was essential for the European Commission, European Central Bank and International Monetary Fund to release further bailout funds.

Euro rises- but for how long?

The euro enjoyed its first strong day of 2012 yesterday with signs that some confidence could be returning to the single currency. Euro rises- but for how long?One of the main topics of discussion at the moment is the ongoing Greek debt deal.

Negotiations had taken a turn for the worse over the weekend after the authorities asked investors to accept new bonds yielding 3.5% rather than the previously agreed 4%.

The Greek government had hoped to complete talks by Monday, but as yet, no agreement has been made.

However, Greek finance minster Evangelos Venizelos said progress was being made and this was one of the main reasons for the euro strength.

He has now set a new date of 1st February to conclude talks.

Although these comments have improved the confidence level of a deal being agreed, until any deal is signed, expect the euro to remain weak as the threat of a default is still alive.

The Bank of Japan kept their interest rates fixed at 0.1% as the bank noted that the Japanese recovery is moving slower than expected.

The strong Yen remains a problem for the economy with corporate revenues likely to be down as a consequence.

The ongoing debt problems in the eurozone remain the biggest risk to the Japanese economy.

Sterling has remained in the middle against its major rivals as the euro strengthened against both the Dollar and the Pound dragging Cable higher with it.

The main news out this week for the UK is the release of 4th Quarter GDP with a -0.1% figure expected.

This significant change in momentum has been priced into the value of the Pound though it will be a massive blow to the global recovery and could be the first of many negative GDP figures from around the World as a second recession starts to bite.

Surprising euro bouceback continues

Against all the odds the single European currency has been resilient this week moving up towards the year to date highs of 1.3068, clawing back its losses and more.Surprising euro bouceback continues

The euro’s ability to defend bad news in Europe has been remarkable and its gains have reflected a speculative market that has been extremely short.

As we are light on headline data today the markets will have to observe the outcome of the somewhat positive Spanish and French debt auctions while keeping one eye on Greek debt talks with private investors.

But for yet another failure of talks in Greece the EUR should continue on a positive footing.

How long this will last is uncertain, particularly given the dangers ahead but at a time when investors have become progressively more bearish on the euro it may just extend its bounce over the short term.

One country to watch is Portugal whose bonds have underperformed recently as markets speculate that it could be the next contender for any debt note.

Back to the UK and Retail sales have come been announced close to median forecasts of +0.6% m/m and +2.6y/y.

Sales have improved in December but the improvement is likely to be short-lived, suggesting any support to the Pound will be brief.

Sterling has underperformed even against the firmer EUR of late but this is supporting better levels for the market to take long positions versus EUR.

This explains the move in relative European/US interest rate differentials, which has been linked with the move in EUR/GBP.

Overall Sterling could outperform EUR over coming months to around 0.80, with the former continuing to benefit from the simple fact that it is not in the Eurozone and has therefore acquired a quasi safe haven status.

Rising bank shares lift European stock markets

Rising bank shares have lifted European stock markets amid hopeful economic signals, results from US banks and a report suggesting the ECB was providing more loans to banks than had been thought.Rising bank shares lift European stock marketsSuccessful French and Spanish bond auctions and falling US unemployment claims also helped improve sentiment.

Bank of America and Morgan Stanley’s results were better than expected.

Commerzbank shares rose 15% after it said it would be able to increase its capital without government help. Also in Frankfurt, Deutsche Bank rose 8%.

In London, Barclays shares rose 10% while Lloyds and RBS were both up 9%.

In Paris, Societe Generale rose 13%, Credit Agricole rose 9% and BNP Paribas gained 8%.

The soaring bank shares helped Europe’s benchmark indexes to strong closes, with the FTSE 100 ending up 0.7% at 5,741 points, its highest closing level since the start of August.

The Cac 40 in Paris closed up 2% while the Dax in Frankfurt gained 1%.

Some of the gains in banking shares were sparked by a report from Morgan Stanley, which said that the European Central Bank was flooding the eurozone banking system with even more cheap loans than had previously been thought.

Short selling sqeeze drags euro up

The recent rally in the euro was very surprising given the lack of any positive or even specific euro related news over the past couple of days. Short selling sqeeze drags euro upMarket sentiment about the single currency remains low (after a temporary blip last week) because a Greek default is looming ever larger and European policy makers are still arguing over the rules that they hope will make the eurozone less weak moving forward.

In fact short positions (betting that the euro will fall in value) hit record highs over the past couple of weeks, which suggests there recent rally is more about shorts covering their positions, leading to the price of the euro rising forcing other shorts to cover, commonly known as a short squeeze.

If, as is likely, this explains the recent uptick in the euro and so we can expect more euro selling to resume once the squeeze runs out of steam.

Data for the eurozone for the rest of the week is extremely light, with the ECB monthly report showing how much the ECB is lending to stricken banks is due Thursday along with French and Spanish bond auctions.

Both auctions will be closely watched in light of the S&P downgrades on Friday.

Sterling has been fairly steady in the early part of the week.

UK Retail sales are the only release of note for the rest of the week but worth noting because they report over key Christmas period for the retailers and will probably give a good idea to the market if the UK economy is heading for (or is already in) another recession.

The US bank holiday on Monday has meant the US Dollar has also been fairly quiet so far this week, but Thursday and Friday sees a large amount of US data including the CPI figure, which should hopefully give the market an end of week shot of much needed direction in an otherwise rudderless few days.

Now S&P holes the European rescue boat

After markets closed last night, Standard and Poor’s (S&P)  the credit rating agency dealt a severe blow to the European bailout fund by downgrading its AAA status to AA+. Now S&P holes the European rescue boatThe agency blamed the large number of guarantors that had lost their triple A crown and therefore the funds itself could not maintain the gold standard rating.

Following the announcement, EU officials attempted to reassure markets that the funds will not change is ambitions to lend billions of Euros to struggling Eurozone states.

Proving how out of touch euro technocrats are the EFSF chief Klaus Regling claimed “The downgrade to AA+ by only one credit agency will not reduce EFSF’s lending capacity of €440 billion”.

This latest downgrade will increase pressure on Eurozone officials and German government to boost their contribution to the European Stability Mechanism which only becomes active in July.

Interestingly the euro has rallied so far following the announcement and currently sits at 1.2021 against Sterling and up against the Greenback at 1.2790.

This morning in the UK we had the latest CPI reading which indicated a 4.2% year on year according to the Office for National Statistics.

This is further fall following last months 4.8% figure and eases inflationary pressure on the Bank of England as it creeps lower towards the 2% target level.

This is the biggest year on year decline since April 2009, which was attributed to discounts on petrol gas and clothing according to the ONS.

The US re-opens today following its Bank Holiday for Martin Luther King day yesterday.

They start their week with Empire manufacturing data which assesses business conditions and expectations of manufacturing executives specifically in New York.

This is followed by a Canadian Interest rate decision where we are expecting them to maintain interest rates at 1.0%.