Wednesday, March 10, 2010

Greek drama is a euro exchange rate negative

Foreign Exchange - Pounds Sterling and Euro Exchange Rate Outlook

Greece may be losing whatever sympathy was building. Ireland already instituted heart-breaking austerity measures, as reported in the WSJ, demonstrating a real commitment to EMU membership. To rail against speculators and whine for better market pricing really cuts into whatever respect investors had for Greece. Those who complain about speculators are always the ones whose prior bad acts put them on the losing end of the trade.

This is not to say credit default swaps should not be regulated. Clearly they wreaked havoc in the housing market. But when it comes to sovereign credit default swaps, why should investors buying Greek bonds be deprived of insurance? We look forward to a lively debate on this topic. A good start is the editorial in the WSJ today that says "The bets against Greek solvency are the result, not the cause, of Greece's debt problems." We think European leadership in banning sovereign swaps is all hat and no cattle.

If the Greek drama is a euro exchange rate negative, so is the relative growth story. The Market News fixed income reporter says the bond gang is mulling over some wild and woolly forecasts, including a rate hike in June, probably unlikely but let’s not be surprised. Some are forecasting a giant rise in March payrolls at the April 2 release, as much 250,000 to 275,000 new jobs created. Unfortunately, April 2 is Good Friday when the stock market is closed and the bond market is open only until noon. You know that optimism is running high when foreign exchange traders start talking about the next payrolls only one week after the last one.

Optimism about the US economy is running high whatever the payrolls forecast. The Blue Chip Economic Indicators report says the economists in their survey raised the forecast for economic growth in March to 3.1% for the third straight monthly rise (although trimming the growth recast for 2011 to “only” 3% from 3.1%). Europe would be thrilled to get “only” 3%.

We do not agree with Wharton Prof Siegel that the ECB will stay its hand on raising rates because of structural problems in the southern tier, but we do think it will stay its hand because it needs to keep low-rate stimulus going and inflation is not a problem. In fact, deflation is still a problem, as an inevitable corollary to recession.

Until we get some additional hard data, like US retail sales (looking good so far), the market will be twitchy. The oil inventory report today could be a real factor—if oil goes up despite higher stockpiles, it would mean oil traders are back of the growth higher-demand-coming bandwagon. Unfortunately, this is either good or bad for the us dollar rate depending on whether the growth story is accompanied by its occasional sidekick, higher interest rates. We like the outlook for the dollar near-term, but first it must break hand-drawn red support around 1.3515.

Bye for Now

Barbara Rockefeller
Foreign Exchange Trading
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