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Greek Junk!
By Mike Conlon | June 15, 2010
Yesterday, Moody’s ratings agency cut Greece’s credit rating from investment grade to junk, citing the economic risks the nation is facing. This derailed yesterday’s rally, and reversed some of the gains just as the Euro session closed. However, defenders are quick to point out that this news has already been factored in by the market and that conditions in Greece have improved since the data used to make the downgrade.
So it looks like the Euro has dodged a bullet—for now. In addition, German economic sentiment came in well below expectations showing signs that the picture is not as rosy as today’s market would have you believe. However, the Euro is higher vs. the Dollar and European stock markets are higher despite what some would consider heightened risk.
In the UK, CPI data declined for the first time in 3 months though housing prices ticked higher showing mixed results in the inflation picture.
Overnight at the Japanese rate policy meeting, BOJ officials unveiled a 33 billion stimulus program despite the comments that the export-led recovery is starting to spread to private domestic demand.
So this morning is a bit of a mixed bag, with stock markets higher, USD lower, but Yen and Euro higher. It will be interesting to see if these markets fall back in line with their usual correlations, or continue on their own path.
In the forex market:
Aussie (AUD): Overnight, minutes from the Australian central bank showed that concern over the European debt crisis may cause the bank to pause from future rate hikes. The RBA has “flexibility”, as previous rate hikes have appeared to have quelled inflation. In addition, in what some may view as counter-intuitive, an RBA Governor said that he would welcome slower Chinese growth, as it would allow the Australian economy to grow at a more moderate pace.
Loonie (CAD): The Loonie is higher this morning as oil has gained to $75.75 due to an increase in demand and a potential supply shock due to the gulf oil spill. In addition, there is a report out that corporations are diversifying away from the Euro and are issue bonds in Loonies, which could be a driver of demand.
Kiwi (NZD): From the not-so-fast department, the Kiwi is lower across the board after 4 days of gains following its rate hike. Overnight, home prices came in lower than expected, falling 1.4%. This may give the RBNZ a reason to pause rate hikes and to move slowly. The RBNZ would like to see a weaker Kiwi to help exports, and this housing figure may be a harbinger that inflation is tame in NZ.
Euro (EUR): So it looks like the Euro is brushing off the Greek credit downgrade as it is trading higher this morning. In addition to the downgrade, German business sentiment came in way below expectations, yet the Euro is higher. There are rumblings around the market of other potential downgrades and measures that other countries should be taking. In my mind this is heightened risk, but the market isn’t seeing that way. Remember to trade what you see and not what you think you know!
Pound (GBP): The Pound is mixed this morning as inflation data slowed for the first time in 3 months. CPI figures came in at 3.4% vs. an expectation of 3.5%. This is higher than the government target figures of 3%, though economists are predicting a decline back below the upper band of the range by mid-year. However, housing prices also rose as demand picked up the most since January. While there is a lot of talk that inflation in the UK is “contained”, only time will tell if this is the case.
Dollar (USD): Stock markets appear to be driving the forex market today, as higher equities prices are reducing the demand for dollars. Empire manufacturing figures came in slightly less than expected but showing growth nevertheless, and import prices came in lower, probably due to recent dollar strength.
Yen (JPY): The Yen is surprisingly strong this morning as risk appetite appears to be happening this morning. Perhaps there is hesitation that carry trades may not be due to advance due to interest rate pauses in Australia and New Zealand. In addition, the BOJ signaled they would be instituting a $33 billion stimulus program to encourage business lending.
So today is kind of an “odd” day, as the currencies are trading more on their own fundamentals and not so much on risk themes. Today is seemingly a risk-taking day, though the demand for carry trades has been reduced due to Yen strength and possible interest rate pauses from the commodity currencies.
The Loonie is catching a bid as oil trades higher and Canada becomes a destination for capital-raising as an alternative to the Euro zone.
The UK is telling us there is no inflation, but the market may be thinking otherwise.
And lastly, the Euro is defying gravity and shrugging off credit downgrades. Perhaps these credit ratings agencies are losing their own credibility, or the market needs to see more from a risk perspective in order to sell-off the Euro. Either way, there is still risk in the market and the market may want to “see” problems occur than “hear” about them.
So don’t fall for the game of “show and tell”—and trade what you see and not what everyone wants you to know!
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