• Dollar Rallies on Growing Greek Default Concerns Despite Stubborn Risk Trends
• Euro Losses Relatively Tame Considering Threat Level on Greece Has Jumped
• British Pound Drifts Through Lending and Mortgage Figures, Can GDP Rouse Traders?
• Canadian Dollar Tripped up by Monetary Policy Report, Looks to Heavy-Hitting Data
• Japanese Yen Receives Another Warning About its Financial Health
Dollar Rallies on Growing Greek Default Concerns Despite Stubborn Risk Trends
It was a crazed and unusual day for the financial markets. Investor sentiment was delivered a shock by startling developments in Greece’s painful descent into default; but the reaction would not be as straightforward as one would expect. Taking on its own progression through the day, the action began with news from the European Union’s statistical group that Greece’s initial estimates for its own debt load were low ball figures. Now at 13.6 percent of GDP (with the possibility that it could eventually top 14 percent), this floundering nation is finding itself in an even deeper hole that it will have to dig itself out from. Adding to this burden, the revision to its deficit would draw a downgrade from Moody’s, officially raising the possibility that default and further boosting its cost of financing. What does all of this mean for the global financial markets and more specifically the dollar? The risks to general stability across the speculative markets have grown substantially over the months all while positioning has pushed further out onto a limb. What is needed to curb risk appetite and ultimately lead to an unwinding of this premium build up is a definitive catalyst. If Greece were indeed to fall into arrears, the implications would obviously be dire for the euro; but could also catalyze a credit seizure and market-wide financial crisis. In this scenario, the greenback will be bolstered by its safe haven appeal. And, while some would argue that the United States’ own debt load could encourage an unfavorable slant though sovereign debt risk; the inevitable flight to safety will likely be so aggressive that the dollar will attract funds from overextended emerging markets and comparatively risky advance economies.
Moving from the dollar’s role as a harbor from turmoil to its own fundamental appeal, we have actually seen the case for yield-based strength temper over the past week. In contrast to the rise in its value as a safe haven, interest rate forecasts have notably slumped. Fed Fund futures are now only pricing in a better than 50 percent chance of at least a quarter point hike until December. More sensitive to the fluctuations in expectations, market forecasts through overnight index swaps (from Credit Suisse) are pricing in a mere 71 basis points of hikes over the coming 12 months. This is significantly below the near 100 basis points forecasted just a few weeks ago; and more importantly, it cuts the premium that the Fed held over the ECB (56 bps) and BoE (56 bps) significantly. Where is this doubt seeping in? Ironically, the IMF’s upgrades to US GDP may actually have something to do with it. While the figures for 2010 and 2011 were upgraded, the notable downshift in pace between the two years is becoming harder to ignore. Like its peers, the world’s largest economy is likely to cool as the responsibility for growth is shifted from government stimulus to actual business and consumer demand. The greater detraction though comes from the inflation argument. Without price pressures, the Fed could keep rates low to promote growth and fiscal stability through the foreseeable future. It is only the side effect of rapid inflation that makes this impossible to sustain. However, today’s factory-level inflation data for the month of March further reduced fears of such an event. While the headline annualized pace of the Producer Price Index was 6.0 percent (in line with expectations), the core figure for the same period was a mere 0.9 percent. There isn’t much pressure in the pipeline.
The other notable fundamental release for the day was the rise in existing home sales for last month. The 6.8 percent jump in deals to a 5.35 million rate of turnover for the year doesn’t fully offset the sharp declines in December in January; but it does point to much needed stability. Looking ahead to tomorrow, we may see some temporary volatility through durable goods and new home sales data.
Euro Losses Relatively Tame Considering Threat Level on Greece Has Jumped
How much more convincing do policy officials need that Greece is on the path to default. News today that the nation’s deficit-to-GDP ratio is 0.9 percentage points higher than originally reported (at 13.6 percent) and could further rise an additional 0.5 percentage points has further added to a burden that had already seemed insurmountable. Before this announcement there was doubt that the country could rouse the necessary funds to fund its debts while riding out a probable recession to meet the necessary austerity cuts to meet the EU’s conditions for accessing loans. The hole is now even deeper and Moody’s has subsequently reduced Greece’s Sovereign credit rating to A3. Fortunately the ECB announced changes to its collateral rules that prevented such a change from preventing the country’s ability to access liquidity from the central bank. This will only lengthen the long, hard road to recovery; and the economic and social impact this will have will not likely be tolerated. Politicians are probably already going through the logistics of a default; but when will the market?
British Pound Drifts Through Lending and Mortgage Figures, Can GDP Rouse Traders?
Yet another round of heavy-hitting economic data from the United Kingdom has crossed the wires with only limited impact on the pound itself. Thursday ushered in a larger than expected increase in mortgage approvals through March (52,000) as well as smaller than expected increases in public. However, it is important to put these timely changes into context. Housing is at risk of stalling in a recovery born largely through a lack of supply. More importantly, public debt has soared over time and led sovereign debt risk to dangerous levels. The regular fundamental docket requires a real shock to overcome the stabilizing effect of the upcoming general election. Perhaps the advanced 1Q GDP data can step up…
Canadian Dollar Tripped up by Monetary Policy Report, Looks to Heavy-Hitting Data
Yesterday, the IMF upgraded its growth outlook for Canada from 2.6 to 3.1 percent. Today, the Bank of Canada set its own prediction for 1Q growth to an impressive 5.8 percent clip. Everything seems to be going the loonie’s way. However, there is reason for doubt. Despite the leading rate of recovery, Canada’s recovery is also destined to cool according to the central bank as stimulus gives way to consumer spending.
Japanese Yen Receives Another Warning About its Financial Health
It is difficult to see the Japanese yen for its own merits. The low interest rate and active sentiment changes have pegged the single currency as a carry currency in heavy risk-based winds. However, Japan is the world’s second largest economy and a vast source of capital. The stability of this wealth is at risk according to Fitch. The rating agency set its debt-to-GDP forecast a 2.1 percent and warned of a future downgrade.
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