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Euro Trashed!
By Mike Conlon | April 28, 2010
I sometimes feel like a broken record when I go on and on about risk in the marketplace, but in my opinion this is the most important factor to consider. Many days worth of gains can be wiped out in one session, and that’s exactly what we saw happen yesterday.
It is no great secret that there are problems in the EU with regard to the Greek debt crisis. The mis-management of the situation by the EU has been particularly deplorable. And just yesterday, at roughly 11AM, S&P downgraded both Greek and Portuguese debt to junk status, adding further fuel to the fire. This sent the stock markets considerably lower, and the flight to safety trade strengthened the Dollar and Yen.
So while there are individual economic data that are reported for the various regions, this Euro crisis is clearly the elephant in the room. Today, the FOMC decision on interest rates is due out, but don’t expect any change to either the benchmark rate or the language surrounding it.
Today the market has seemed to have shaken off yesterday’s news and is bouncing higher, though gains may be short-lived as risk fears increase with every passing day of a Euro non-resolution.
In the forex market:
Aussie (AUD): The Aussie is higher this morning as inflation has picked up down under. The CPI figures show that prices climbed .9% last quarter, slightly higher than analyst expectations. The year-over year figure was also slightly higher to 2.9%, prompting analysts to increase their view that yet another rate hike may be forthcoming at next week’s policy meeting.
Loonie (CAD): The Loonie is also higher this morning on slight risk-taking and a rebound of commodity prices despite the fact that Bank of Canada Governor Carney said that “nothing is pre-ordained” with regard to a Canadian rate hike. This is a basic attempt to jaw-bone the Loonie lower, as a stronger currency poses a risk to economic recovery.
Kiwi (NZD): The Kiwi is higher on risk-taking ahead of the interest rate policy decision due out tomorrow in the overnight session. While rates are expected to remain stable, be aware of any clues that may signal a rate hike sooner than the market is currently expecting. In addition, NZ business confidence figures came in better than expected adding to Kiwi strength.
Euro (EUR): Oh the Euro! So the Euro breached 1.32 yesterday on the debt downgrades to junk status, and no resolution is in sight. The major impediment right now is that German delay tactics; and the market is pressuring action by selling the Euro and demanding higher yields to loan to troubled EU members. Part of the problem is that elections are taking place in Germany, and bailing out Greece would not be seen as popular. Meanwhile, the Greeks are striking to protest austerity measures which could slash salaries by 30-50%. Regardless of what happens in the near-term, this does not look good.
Pound (GBP): The Pound is lower this morning as a BOE policy-maker described the UK economy as being in a “fragile state”. This comes in advance of next week’s elections which frankly can’t get here soon enough. What was once thought of a strictly a battle between the Conservatives and the Labor Party has rapidly turned into a three horse race as the Liberal Democrats have charged onto the scene and are making the most headway. This all but guarantees a “hung Parliament”, but concerns over the UK budget deficit reduction plans and how it will affect economic recovery remain at the forefront.
Dollar (USD): Today’s FOMC meeting is expected to produce no change. Recent pockets of decent economic data show that the economy is improving, but at what rate? The pace of recovery is important because the longer it takes, the harder it is to gain the momentum necessary to grow and create jobs. Bernanke testified yesterday that the US has to do something about its budget deficit besides making phantom projections that we can grow our way out of it. The Goldman Sachs hearings yesterday only added to the view that elected officials are almost completely incompetent.
Yen (JPY): The Yen is weaker on the resumption of carry trades and that retail sales figures came in higher than expected, rising at the fastest pace in nearly 13 years. This is important because it shows signs that domestic demand may be improving in Japan, which had for years been known as a country of savers. This is just one data point that demonstrates that economic recovery may be taking place, after years of stagnation.
One of the great things about the forex market is that it is a relational market. By that I mean that regardless of how good or how bad a particular currency may seem, it will always trade with respect to other world currencies.
If the Euro were a stock right now, there’s a good chance it would be halted by the exchange to restore balance. If it was a commodity, it would probably be “limit down”. And yet here the Euro is, showing gains against the Dollar, Pound, and Yen despite all of the risk surrounding the region.
What this means is that there is good volatility which in turn means good opportunity. This can be seen day in and day out as the market vacillates between risk taking and risk aversion. It’s not that the market has forgotten about the risk related to the Euro, but rather knowing that a currency does not trade in a vacuum. In this regard there is money to be made from either point of view. The important things to remember are to be aware of the time frame you are trading in; and always use proven risk management techniques.
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