Today’s FX View from IB:
Stern spending cuts and further increases in tax levies announced today in the Greek budget provided somewhat of a reprieve to the euro in midweek trading. Improvements in British data also helped reduce the appeal of selling the unit short, while concerted regulatory efforts to track down profiteers engaging in the creation of an Armageddon-style ending for the Eurozone may also be helping reduce the value of outstanding bets against the euro.
Euro – The euro is marginally higher against the dollar at $1.3624 with two clear catalysts this morning. The government of Greece announced in a budget, plans to reduce by 5%, the level of outstanding debt to GDP to 8.7% during 2010. The package amounts to 2% of GDP and involves €2.2 billion in spending cuts as part of a €4.8 billion package. The deal appears to have been received well in the markets and PM Papandreou must be hoping that the measures will help draw Athens closer to Berlin and Paris ahead of key discussions starting on Friday and lasting into the weekend.
On the revenue side, the government raised taxes on sales of tobacco and alcohol while reducing spending on civil servants’ salaries. A 30% reduction in civil servants bonus payments received tri-annually is unlikely to be a treat for those losing the benefit, but will sit better with EU leaders who need such a sweetener in order to encourage them to sell the notion of a German-Franco aid package to help lower the cost of capital to Greece. For his part Mr. Papandreou warned of the growing catastrophe should the cost of Greek membership to the EU exclude his nation from the low borrowing costs provided to each other member.
U.S. Dollar – EU officials have recently accused investors of distorting the realities of the current crisis by clouding the market’s view on the perceived outcome. Betting against the euro specifically through buying various instruments that magnify the perceived outcome of an event is being frowned upon by the authorities. Investors buying credit default swaps, for example, who pushed the price of insuring against debt default ever higher are being judged by EU officials as creators of a problem that could still lead to an undesirable outcome. The U.S. Department of Justice has also sent letters to some hedge fund attendees at a recent dinner in New York during which 23 trade types were discussed. I’m not suggesting that the sponsors conspired to “educate” the hedge funds on how to profit from the crisis, but am highlighting the extent to which the crisis attracted the construction of trade types that would benefit from a collapse of either Greece, the Eurozone or both.
The dollar remains stable on Wednesday and faces several key pieces of data over the next three sessions with employment data being the dominant theme. Recent evidence suggests an amelioration in the pace of labor market improvement with weekly initial claims last week rising uncomfortably towards the half million mark for the first time in three months. The Challenger Gray and Christmas mass layoff report is the first measure of health and it came in 77% lower than a year ago. We can’t read much into this and already know that the bulk of redundancies have already been made. The ADP employment reading showed private employers shed 20,000 jobs in February – in line with forecasts. Of course weekly initial claims are due tomorrow while the most important official non-farm payroll is due Friday. Reaction to all of these is likely to be tempered by developments in Europe. An improvement in dealings with Greece could conceivably overshadow negative U.S. numbers, which might otherwise provide a risk-aversion boost for the dollar.
British pound – The pound rose for the first time in seven sessions against the dollar and is stronger against the euro and yen. A Nationwide Building Society survey of consumer sentiment improved to a reading of 80 despite a forecast of 73, and while this is not a major calendar event, it does provide some respite from recent tepid data. Elsewhere the February service sector PMI reading at 58.4 compares to a reading of 54.5 in January and proves the fastest pace of growth within the sector for three years. The pound is trading at $1.5062 and up a cent on the dollar.
One overlooked factor that I did highlight at the time of the Prudential’s announced plan to takeover AIG’s Asian business is the likely sale of sterling that coincided with Monday’s official announcement. Today a spokesman for the company did confirm that a sterling hedge was made ahead of that announcement in relation to the $35.5 cash and stock deal. Since that time shares of the company have fallen by 20% and this fact is casting doubt on Prudential’s ability to pull off the deal.
Aussie dollar – Some vindication for Tuesday’s interest rate increase – if it is needed – came today in the shape of accelerating growth. The Australian Bureau of Statistics said that fourth quarter growth was three-times the pace of the third and registered an annualized 2.7% pace as demand from its Asian trading partners spurred exports. The Aussie unit is flat at 90.35 U.S. cents today while it appreciated to a decade high against its neighboring New Zealand where growth is returning at a slower pace.
Canadian dollar – Canadian Prime Minister Stephen Harper reveals his outline for the next year’s budget. Businesses are aware that record spending aimed at offsetting the headlong fall in to recession is ending and will be looking for additional measures to maintain the pace of growth. The Canadian dollar this morning is struggling to continue its recent move higher, but is equally showing no signs of relenting after the Bank of Canada’s upbeat economic assessment at Tuesday’s policy decision to keep interest rates unchanged. A single Canadian dollar buys 96.76 U.S. cents today and is creeping towards parity.
Japanese yen – Little movement in the yen overnight although it continues to make gains against the U.S. dollar at ¥88.63. The euro buys ¥120.88 while a pound buys ¥133.44.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.