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European Woes Back In Focus!
By Mike Conlon | November 8, 2010
Now that last week’s news from the US has come and gone, focus is shifting back to the Euro zone and more specifically the debt crisis. As recent forex market trends have been primarily Dollar-driven ahead of QE2, the US Elections, and NFP, the market is slowly turning a cautious eye back to the EU.
This week is light on news, so when investors do not have specific data to rely on, often we will see more fear in the markets as there is very little to counteract that sentiment. This is exactly what is taking place in the Euro zone and particularly in Ireland right now. Bond yields in Ireland have increased dramatically as investors fear that the small country may need to access the EU emergency facility, just like Greece did. As yields continue to move higher it makes it more difficult for them to re-fi and thus starts a self-fulfilling prophesy where indeed they can’t afford to service their debt. Not helping matters is the fact that Germany has called for bondholders to bear some of the cost of any potential losses.
However, Ireland has put forth some aggressive measures to deal with their deficit and at this point could be Germany’s way of inducing fear to slowdown Euro strength in the wake of the US QE2. We’ll have to see how this all plays out but I would be shocked if China refused to buy these bonds at these current rates. After all, they have been calling for US fiscal responsibility and it would look bad if they didn’t buy Irish bonds as they are following the program the Chinese would like to see.
After last week’s market gains, the morning is starting out in risk-aversion mode with stocks and commodities lower, and Dollar and yen stronger.
In the forex market:
Aussie (AUD): The Aussie is lower on concerns over the European debt crisis and general risk aversion. Tomorrow will bring the RBA financial stability report and Thursday is the unemployment report which will show the strength of the economy.
Kiwi (NZD): The Kiwi is lower this morning as in addition to general risk aversion, home prices rose at their slowest pace in nearly a year. Also, there is a potential threat to NZ exports as there is a bacterial disease on kiwifruit which represents some $1 billion to the economy.
Loonie (CAD): The Loonie is lower this morning but trading just above parity to USD on reduced oil prices and reduced housing starts numbers which missed expectations. The BOC Governor is set to speak on Tuesday regarding financial reform but otherwise expect the Loonie to trade on risk themes this week.
Euro (EUR): The Euro is lower on the renewed debt fears coming from Ireland and Germany’s lower than expected industrial production figures. However, Euro zone investor confidence figures came in better than expected, as did German trade balance figures. The EU is below 1.40 vs. USD on these heightened fears. (Click chart to enlarge)
Pound (GBP): The Pound is mixed and behaving as would be expected under classic risk aversion scenarios. The major news out of the UK this week will be the BOE quarterly inflation report, which the market will be watching closely to see if this changes interest rate sentiment.
Dollar (USD): The Dollar is strengthening this morning on risk themes as perhaps the threat of default in the EU is outweighing the potential effects of QE2. Today we are getting some Fed speak from Bernanke underlings, and otherwise this is a quiet week for the US, outside of the usual 450K initial jobless claims mid-week and Friday’s consumer confidence figures.
Yen (JPY): The Yen is higher today as demand for carry trades is lower on increased risk aversion. Japanese trade balance figures are due out tomorrow which will show if the stronger Yen has greatly affected exports and if so, what will the BOJ do about it? (Click chart to enlarge)
The symbiotic relationship shared by both the Euro and USD will be in focus as concerns over European debt heat up. While the EU has the means and the facility to deal with these problems, the fact that they are seemingly backing away is giving the market good reason for concern.
This is seemingly a bit of “tit-for-tat” as perhaps the EU wants to see a lower priced Euro so they are inducing risk aversion to counteract the Dollar weakness that has been responsible for Euro strength as of late. This is just one more tactic in the “currency war” that we are seeing unfold.
The EU is expected to approve Ireland’s budget plans, so that may give them some relief on the yield front. What I find so interesting these days is that bond investors have become such pansies. Everyone wants yield AND guarantees, but isn’t that what higher yields are for?
So I don’t blame Germany for saying that bondholder should bear some of the risk, as they are being rewarded handsomely for doing so. Ireland appears to be solvent enough and will not default, despite all of the rhetoric to the contrary. The EU emergency facility has been established for just this reason and should Ireland need to access it, so be it. However, the EU will not mind one bit if the Euro gets driven lower in the process.
Just another day in global economic warfare!
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