Yen, Dollar Fall Against Majors

The yen and US dollar fell against most major currencies after Greece employed banks to sell seven year bonds in the first Greek bond sale since the EU agreed on a loan mechanism  to aid the heavily indebted Athens government. The announced bond sale sparked a rise in risk sentiment although some experts believe the relief will be temporary. John McCarthy of ING Groep NV I stated, “There’s temporary relief over Greece. It’s also all across the board. The Aussie and kiwi are higher, firmer equity markets, relief over Greece helped pushed the dollar lower.” The yen fell 0.4% vs. the euro trading at 124.56. The euro advanced 0.3% vs. the dollar to $1.3450. The euro has gained ever since the EU IMF deal was announced although details remain unclear. IMF head Dominique Strauss-Kahn said that Greece has not yet asked the IMF for aid and shows no signs of needing  IMF aid anytime soon. Strauss-Kahn told an audience in Warsaw, “I hope that the EU strategy for Greece works. We are ready to help Greece as with any of our members but it is not obvious today that help will be absolutely necessary.”

Trichet Says Including IMF Could Damage Euro’s Credibility

Under the deal reached with the EU the IMF would provide one third of necessary funds if a rescue package for Greece is needed with the euro zone providing the rest of the funding. Details of the agreement are still unclear and have yet to emerge. IMF involvement was a condition imposed by conservative German Chancellor Angela Merkel despite opposition by the European Central Bank. Jean Claude Trichet has repeatedly stated that requesting IMF aid could create the impression that the EU cannot manage its own problems and puts the credibility of the euro at risk. Greece has imposed austerity measures including tax hikes and wage cuts and is hoping for a successful bond sale.

Fitch Outlook For Greece Remains Negative

Despite the EU IMF agreement Ftich’s rating for Greece remains negative. Ratings agencies Standard and Poor’s and Moody’s said their outlook on Greece will not be affected by the EU IMF deal. In a statement Fitch said, “The (EU) statement was positive for Greece’s credit profile by enhancing its near-term financing options and flexibility as well as reaffirming the support of euro area member states for economic and fiscal reform in Greece. Nonetheless, the rating outlook remains negative because of continued uncertainty over the medium-term economic and fiscal adjustment, as well as the continuing lack of clarity over the fiscal financing strategy.”

Most Predict Dollar Gains

Most currency experts expect the US dollar to continue last week’s gains as concerns about Greece’s debt situation remains. The agreement between the European Union and the International Monetary Fund to provide a safety net for the Athens government has prevented a euro freefall but euro sentiment remains negative among investors. Details of the agreement remain unclear causing investor concern. Some analysts fear that a similar crisis could occur in other EU nations. John McCarthy of ING stated, “Although we have this agreement on a Greece aid package, it is somewhat unclear as to whether it is going to be applied, when is it going to be applied…and the fact is Greece still has considerable debt. What’s to say that we will not go through this again with Greece or Portugal. This is not going away in the immediate future.” Some currency strategists have predicted that the euro could fall as low as $1.30 in spite of the EU IMF agreement. So far the euro has fallen 6.4% in 2010.

Germany Sets Conditions

In early 2010 concerns about the solvency of the Athens government emerged and the euro has remained under pressure since then. Although last week’s agreement decreases the likelihood of a sovereign debt default be Greece some are questioning the stability of the euro. Germany imposed strict conditions and almost one third of all Germans believe that Greece should be asked to leave the EU. Almost 40% in Germany believe that Germany would be better off outside the euro zone. Earlier in the month German Chancellor Angela Merkel said that EU members should help Greece if it is “at the brink of bankruptcy, which it luckily is not at the moment.”  Many believe Greece has lived beyond its means and fear the crisis could spread to other EU states.  Of particular concern to investors are other debt ridden euro zone members including, Portugal, Italy, Ireland, and Spain.

Concerns About Spain

Spain is of particular concern. Unemployment in Spain is at 20% and Spain’s deficit amounts to 9% of GDP and the nation is expected to take on more debt with bond issues. Many fear that a similar crisis in Spain would be devastating to the euro. Simon Tilford of the Centre for European Reform stated, “Spain is going to pose a big problem. It is in all sorts of trouble about how it will increase growth. It lost a great deal of competitiveness, and costs have gone up. Any economy regarded as having poor growth prospects is going to struggle to borrow at affordable levels.” Some have proposed the creation of a new currency bloc with Germany as the leader and would be composed of mostly northern European nations.

EU Leaders Agree to Franco German Rescue Plan

European leaders have agreed to allow the participation of the International Monetary Fund to aid debt stricken Greece. Leaders of the sixteen nation euro zone approved a French/German rescue plan for Greece which includes a combination of bilateral and IMF loans to Greece. European Central Bank president Jean Claude Trichet remains opposed to IMF participation and believes that seeking aid outside the EU could damage the credibility of the euro zone and its currency. Trichet stated, “If the IMF or any other authority exercises any responsibility instead of the eurogroup, instead of the governments, this would clearly be very, very bad.”  Trichet’s comments could put the ECB on a collision course with EU leaders as they struggle to prevent Greece’s crisis from spreading. After Trichet’s comments the euro pared earlier gains and returned to a ten month low against the US dollar trading at $1.3277 after hitting a high of $1.3387. About Trichet’s comments currency expert Camilla Sutton of Bank of Nova Scotia stated, “Trichet’s comments highlight the ongoing uncertainty in the EU and it’s the uncertainty that’s impacting the market. The implication is that an IMF aid package would be negative for the currency.”  Under the French German agreement the EU will provide half of the loans and the Washington based IMF would provide the rest.

Investors Skeptical

Investors remain skeptical and euro negative. John Curran of CanadianForex Ltd stated, The market doesn’t care that “France and Germany are saying they have the framework to a plan to support Greece including the IMF. It’s like ‘Yeah, OK, great, I have a plan for winning the lottery, too.’ Show us something that works.” An unnamed EU official said late today that EU member nations have agreed on the Franco German rescue plan. Investment giant Goldman Sachs pared bets that the euro appreciate vs. the greenback after the trade lost 2.8%. Thomas Stolper, a Goldman Sachs analyst stated, “We have clearly underestimated the impact on the euro from the European sovereign crisis and perhaps also from the broader macroadjustment that it portends. These political headwinds currently matter far more for the euro than the cyclical factors.”

US Jobs Report Pushes Dollar Higher vs. Yen

In other currency news the dollar strengthened vs. the yen after a report showed that first time applications for unemployment benefits fell by 14,000 to 442,000 during the week that ended March 20th. According to several economists the US added 187,000 jobs this month and a new Labor Department report is due on April 2nd.

Germany Sets Conditions

German opposition to any assistance to Greece has been widespread and has caused a political rift in the euro zone. On Tuesday Germany signaled for the first time that it may accept EU aid for Greece but only if the International Monetary Fund is involved and EU nations accept tighter budget rules and regulations.  A German official listed the conditions for EU aid to Greece;

The IMF would need to provide a “substantial contribution” to any aid package.

Greece would not be able to access credit markets.

European Union nations would have to negotiate and approve “additional instruments” to impose budget discipline over existing rules that enabled Greece to run up huge debts and deficits.

ECB and Eurogroup Oppose IMF Solution

An unnamed source in Chancellor Angela Merkel’s government said that Germany would only agree to EU aid for Greece if aid packages combined bilateral EU and IMF assistance. The senior official stated, “The condition for action, as a last resort, is that Greece’s financing on the capital markets is exhausted. There are first signs from various capitals that people could envisage financial co-assistance by the IMF.” EU sources said that France and Germany, which were co founders of the euro are attempting to reach a joint position to be presented at the upcoming EU summit. Talks have been described as “very sensitive”. European Central Bank President Jean-Claude Trichet and Eurogroup chairman Jean-Claude Juncker said that involving the IMF could send the message that the EU is incapable of resolving its own problems. Julian Callow of Barclays Capital stated, “The message from Berlin is crystal clear really, which is that Greece still needs to continue not just with consolidation but to test the markets out and if necessary use the IMF. The implication is that Germany will support Greece only if the IMF channel does not deliver.”

Greece’s Debt Hits 12.9% of GDP in 2009

Greece’s debt is expected to reach 120% of national output and hit 12.9% of the nation’s GDP in 2009 and Greece’s problems have shaken investor confidence in the multi nation currency. Credit rating agency Fitch said it does not expect a solution to Greece’s debt problems at the upcoming EU summit and also said that failure to reach an agreement would not prompt a downgrade. Chris Pryce, of Fitch said, “As long as the market is prepared to make the money available to the Greek government at any reasonable price — current rates are reasonable given circumstances although not desirable — we would have no immediate reason to change the rating.”

Greece May Seek Aid From IMF

The euro continued its fall Friday as investors and traders speculated whether Greece will obtain financial aid from other EU nations. Greece’s debt problems have pressured the euro since 2009 and disagreements about how to aid the ailing nation have caused political rifts in the euro zone.  The Athens government has indicated it may seek aid from the IMF and no concrete decision about how to aid Greece has been forthcoming from recent EU meetings. Most expect Greece to be high on the agenda of the upcoming EU summit next week. Michael Woolfolk of BNY Mellon in New York stated, “The tensions surrounding Greece are escalating. This whole IMF situation has become a game of brinkmanship and the whole uncertainty is undermining the euro.” European Central Bank President Jean-Claude Trichet and other EU officials have nixed IMF participation but the administration of Germany’s Chancellor Angela Merkel believes that the IMF should have a role in helping Greece. Greek Prime Minister George Papandreou said his country may turn to the IMF for aid if EU leaders fail to set up a lending mechanism at next week’s EU summit. Greece has to raise 10 billion Euros ($13.6 billion USD)  to refinance government bonds by April 20th and May 19th.Nobel Prize winning economist Robert Mundell said that the IMF should be a “lender of last resort” for Euro Zone nations.

European Commission President Calls For EU Aid For Greece

European Commission President Jose Manuel Barroso urged EU nations to agree to a standby aid mechanism to aid Greece as soon as possible. Barroso said Euro Zone nations should make coordinated bilateral loans to Greece and also said such loans would not violate the EU’s rules against bailouts. Barroso stated, “The European Commission is ready to make a proposal for an instrument for coordinated assistance for Greece. Such an instrument will be constituted by a system of coordinated bilateral loans and will be compatible with the no bailout clause and with strict conditionality. I urge all member states to agree as soon as possible on this instrument.”

BOE Says UK May Return to Recession

The US dollar and the yen gained on most major counterparts as the Dow Jones Industrial Average fell paring demand for risky assets. The pound was hammered in currency markets after the Bank of England said the UK may return to recession. Singapore-based Rogers Holdings Jim Rogers had this to say about the pound, “Things are pretty bad for sterling for the long, long, long term.  I cannot imagine buying sterling back unless it gets really cheap.”

Euro Gains on EU Aid to Greece

The euro made inroads against most major currencies after European finance ministers worked out a Greek aid plan. Better than expected German investor confidence figures also sent the euro higher in global currency markets. The US dollar was little changed in advance of a Federal Reserve meeting on Wednesday. Most experts expect the Fed to keep rates at historic lows. Camilla Sutton of Bank of Nova Scotia stated, “The dynamics are supportive of the euro. The data was supportive and there’s progress on the European Union front. Everything is coming together to support risk sentiment.” The greenback fell 0.5% vs. the euro trading at $1.3748. At a meeting Tuesday EU officials worked out emergency loan strategies designed to prevent a Greek default.

EU Nations to Pool Funds for Greek Loans

Despite the rescue mechanism devised by EU officials the euro remains under pressure. Standard and Poor’s gave Greece a BBB+ long term rating and an A-2 short term rating with a negative outlook. According to an unnamed EU official aid to Greece will likely come from EU nations pooling funds for direct loans to Greece. Details yet to be worked out include, loan sizes, how long the loans would last and which nations will participate in proposed loan programs. Greek Finance Minister George Papaconstantinou stated, “We are in a common currency area and it is clear that in a common currency area, persistent, huge divergences in terms of competitiveness between different member countries are not viable. Just as it is not viable for Greece to continue to lose competitiveness over the long run and running a persistently very high deficit. Similarly, it would be helpful if those countries that are running surpluses are the engine in a certain sense and help the entire euro zone get out of the difficult situation that it is (in).”

FOMC to Keep Rates Low

The Federal Open Market Committee meets today and most experts expect the FOMC to leave the target rate at 0.25%. While the Fed is expected to acknowledge that the US economy is recovering, high unemployment and the withdrawal of stimulus measures will prompt the Fed to keep rates at historic lows until recovery is certain. The Canadian dollar is on track for parity with the US dollar and hit a 25 year high vs. the British pound. The Canadian dollar has gained 3.7% this year against the greenback thanks to rising commodity prices and strong signs of Canadian recovery. On Tuesday March 16th the Canadian dollar gained 0.5% to C$1.0147.

Euro Zone Industrial Output Rises

Strong euro zone economic data prompted euro gains in global currency markets. Euro zone industrial production figures showed the biggest monthly industrial output on record in January. Some currency experts expected the move and Nick Bennenbroek of Wells Fargo in New York stated, “What we’re seeing here is probably corrective strength in the euro and sterling. We had very large positions in these currencies so they are due to bounce anyway. And we got some positive news on these currencies, which was a convenient excuse for these to gain.” The pound gained for the second straight day vs. the US dollar after a report showed that UK house prices gained at the fastest rate in seven years. Home prices in Wales and England rose 1.9% in February the largest increase since 2002. Election concerns are still putting the pound under pressure as investors fear government gridlock in the UK.

Pound Gains on UK Housing Data

Many experts believe that the UK could have its first minority government since 1974 which could hamper the nation’s ability to address economic concerns. The pound gained 0.8% vs. the US dollar trading at $1.5184. Prime Minister Gordon Brown said that this years UK budget will be delivered on March 24th and called recovery in the UK ‘fragile.’ Bank of England Chief Economist Spencer Dale said that the Bank of England’s 200 billion pound ($303 billion USD) bond purchase program is starting to yield results. In a speech at Cambridge Dale said, “There are perhaps some tentative signs that nominal spending in our economy is starting to accelerate. Much of the impact of our asset purchases to date is still to come through and so it is too early to judge their final impact.”

EU Nations Will Aid Greece

The euro gained after a report by the French newspaper Le Monde that said that EU nations will offer Greece and aid package of 20 billion to 25 billion euros, ($27.56-$34.45 billion USD) Le Monde reported that meetings took place in Brussels with the goal of reaching a compromise regarding aid to Greece. The report said finance ministers had to choose between a loan facility financed by euro zone nations or a facility financed by EU member states and guaranteed by EU member states. The facilities can only be used if needed and Le Monde noted that Greece faces more debt refinancing in April and May. A meeting between the European Central Bank and the European Commission will take place Friday. Economic and Monetary Affairs Commissioner Olli Rehn pointed out that the EU could lose credibility if Greece defaults.

Loonie at Five Month High

The Canadian hit a five month high as investors bet that Canada’s recovery will experience strong recovery from the global recession. Oil, one of Canada’s chief exports traded above $81 dollars a barrel for the sixth straight day and a Canadian government report is expected to show that Canada added 15,500 jobs in February. Eric Lascelles of Toronto-Dominion Bank stated, “The Canadian dollar has seen a monumental run in the last several weeks. For once the motion is because of fundamental factors in the economy that has prompted the Canada-U.S. rates spread to look more attractive, with people piling on that trade.” The Canadian dollar traded at 97.54 U.S. cents and some currency analysts say that the ‘loonie’ could achieve parity with the US dollar if the Bank of Canada raises interest rates. The Canadian dollar tends to rise and fall with stocks and commodities. Speaking about possible parity with the greenback Avery Shenfeld of CIBC in Toronto said, “We expect the Canadian dollar to hold firm even in this period of U.S. dollar strength, thanks to strong domestic performance in the first half. Enhanced expectations of a Bank of Canada interest rate increase, coupled with a lower probability of a Fed hike come the second half of the year, could lift the loonie past parity.”

Better Than Expected Canadian Data

The Canadian dollar gained a full 2.5% vs. the US dollar since the beginning of March and the Bank of Canada said on March 2nd that inflation and economic output are much better than expected. A Canadian jobs report due Friday may push the loonie even higher but some analysts are skeptical. Stewart Hall of HSBC Holdings Plc stated, “The push to parity is going to be harder than many may suspect in the absence of a significant pick up, well beyond the market median, for Friday’s Canadian jobs report. In the back of the market’s mind is the idea if the currency runs amok, it plays havoc with the overnight rates story and market sentiment that is looking for the Bank of Canada to come off the sidelines in the second half of this year.”

Commodity Linked Currencies Higher on Chinese Data

Chinese export data pushed commodity linked currencies higher. The Aussie dollar gained 0.6% vs. the US dollar and traded at0.9186. Australia is one of China’s chief suppliers of raw materials. The Kiwi dollar gained rose to a five week high against the greenback gaining 0.9% trading at 0.7087. In a note to investors Commerzbank analysts stated, “They (Australian and New Zealand dollars) are benefiting from good Chinese data which suggest that the economy there is expanding strongly.”

EU Pressure on Greece

Bad news from Europe continues as the pound continues its decline and Investors remain concerned that Greece’s austerity measures may not be enough. On Wednesday the Greek government is set to announce 4.8 billion euros ($6.5 billion USD) of additional deficit cuts. Greece is under pressure from the EU and investors to add additional austerity measures. New measures include increased taxes on tobacco and alcohol and more cuts in bonus payments to public workers. The bonus cuts are unpopular with public workers who have scheduled a strike for mid March. EU Monetary Affairs Commissioner Olli Rehn told the Athens government it must announce additional measures “in the coming days” to reassure EU official’s fears that current measures fall short of what is necessary to resolve the nation’s fiscal crisis. Greek Prime Minister George Papandreou said in a speech that the cuts will be “painful” and that public workers whose benefits have been cut and their wages frozen “will have to get by on less.” Tax hikes are in the works and Papandreou acknowledged that while raising taxes may stall economic growth the “primary threat is not the recession, but something worse, finding ourselves unable to borrow.”

EU to Aid Greece

The troubled euro rose vs. the US dollar gaining 0.3% trading at $1.3605. News of further Greek budget cuts prompted the Euro’s gains as investors believe that further Greek austerity measures will make aid to Greece more attractive to other EU nations, most notable Germany where opposition to Greek aid is widespread. German officials say that the EU is putting together a plan to grant Greece about 25 billion euros if needed. Many believe that any aid to Greece will be a band aid sort of approach and will not address the nation’s real problems. Jessica Hoversen of MF Global Ltd. in Chicago said, “The bailout is not going to fix the problem. If you propose that Greece implement more austerity measures, you court more social unrest and a further decline in growth. If you don’t, it may allow Greece to skirt fixing the structural problems that put them in this position. These big macro issues are like snow that piles onto the roof until it breaks through.”

Pound Under Pressure

In addition to euro zone troubles the pound has come under pressure due to political uncertainty in the UK.  Recent polls show that the UK may have it’s first minority government since 1974 and will make efforts to reduce the UK’s debt politically difficult. John Doyle of Tempus Consulting said, “The pound is in freefall. There seems to be nothing supporting the pound as political worries build. There’s still some downside to the sterling.”