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Euro Advances as Greece Toes the Water with Debt Sale and Data Improves

Euro Advances as Greece Toes the Water with Debt Sale and Data Improves

2010-03-30 00:16:00
John Kicklighter, Chief Currency Strategist
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Dollar Starts the Week off with Aggressive Selling as Currency Regresses to Sentiment
The dollar didn’t drop as sharply this morning as it did last Friday; but this second consecutive slip perhaps holds greater influence over its future. Feeding off the momentum from last week’s reversal, the currency is now threatening to slip back into the congestion zone that held the benchmark fast for the better part of two months. While the fundamental contributions to this unfavorable trend were not exceptionally surprising or hearty, the dollar’s sensitivity to such developments ensured its weakness. Risk appetite is the source of the greenback’s current malaise. The accord that the European Union reached on a joint Euro-area and IMF bailout contingency plan for Greece last week was given new weight Monday when the member in question announced it would raise funds in a five billion euro debt auction. This, more than anything, is a meaningful step towards establishing stability as the nation’s ability to fund its recovery is at the center of this year’s biggest fundamental threat thus far. On the other hand, while this market operation would have a meaningful impact on the euro (the primary counterpart for the US dollar), its impact on underlying investor sentiment itself (international equities, commodities, corporate debt, etc) was relatively limited. However, it was all the encouragement the greenback would need to fall back into line. The impressive, bullish breakout the dollar produced last week ran astray of otherwise dormant sentiment trends (regardless of what the Dow’s dubious advance would imply). With an unshakeable role as a safe haven currency in the FX arena, the greenback will not be able to stray from risk trends for long.

The pull that the intangible sentiment side of the market would have on the dollar would seem even more remarkable considering the scheduled event risk released in the morning hours was generally supportive to the recovery of the world’s largest economy. According to the Commerce Department, American’s increased their spending by 0.3 percent through February. While this was merely in line with expectations, it was nevertheless the fifth consecutive increase in consumption. Each of these standard monthly indicators is important for its unique ability to adjust growth expectations; and in this capacity, this spending report is perhaps one of the most influential indicators available. Accounting for more than three-quarters of activity in the world’s largest economy, consumer spending will determine the stability and pace of the recovery in US growth. On the other hand, today’s data would be tempered by the unchanged reading on personal income for the same period. Without growth in jobs and wages, the American consumer will not have the means to fuel a recovery as there is no longer the same access to credit and home equity that was so prevalent before this generation’s great crisis. For this reason, we will also have to account for the presence of Friday’s NFPs and the impact it will have on price action in the day’s preceding its release. The influence this indicator has over the market could anchor anything short of a trend derived from one of the primary fundamental drivers. 

Related: Discuss the US Dollar in the DailyFX Forum, Dollar Forces an Essential Breakout but Where is the Drive?

Euro Advances as Greece Toes the Water with Debt Sale and Data Improves
The European Union’s groundbreaking accord last week to bailout Greece should the government be in dire need of assistance was aimed at one thing and one thing alone: stabilizing confidence in the country’s solvency. If the market is worried that the nation would be unable to pay its debts, the availability of capital will be essentially cut off (or prohibitively expensive) and the economy could be forced to default. Therefore, regardless of the notably hollow promises offered this past week, the true litmus test for establishing Greece’s stability is its ability to access the credit markets. Monday, the government announced a sale of five billion euros worth of seven-year bonds at a yield of six percent (310 basis points above the mid-swap rate). This offered little to no premium over existing debt; so they are heavily dependent on investor sentiment. Considering equities were up on the day and investor optimism was generally buoyant, this was strategic timing for setting the first sale. However, should sentiment fall apart, Greece will be at the top of many investors’ panic list. In addition to this exogenous event risk, the docket would provide additional fundamental substance to work with. The German consumer-level inflation data for March was surprisingly strong. The 1.1 percent pace of annual growth in prices builds the argument for coming inflation; but is far from making it an immediate concern. Also remarkable was the 22 month high in the Euro Zone economic confidence gauge. A long-term reading to be sure, but promising nonetheless.

British Pound Strengthens on Improving Credit Figures

The British pound was one of the notable currencies to offset the euro’s strength and end the day with an advance against the second most liquid asset in the FX market. Where did this strength come from? Off the calendar, policy makers from different political groups were preparing for a debate over the path they would take should their party win the general election that will have to take place on or before June 3rd. The Conservatives’ Treasury spokesman Osbourne has suggested he could trim the nation’s deficit by an additional 12 billion pounds. While the growth implications are still up in the air, such promises are attractive considering Standard & Poor’s reaffirmed its “negative” along with the UK’s top credit rating. As for scheduled event risk, February mortgage approvals fell to a nine-month low as reduced supply is leveraging prices. On the other hand, net consumer credit for the same month hit a 15-month high of 500 million pounds, pointing to a thawing credit market.

Japanese Yen Focuses on Risk Updraft rather than Strong Retail Sales
It has been a remarkable start to the week for the Japanese yen fundamentally and technically. From the latter point of view, losses were encouraged by the pickup in risk appetite. However, for the growth outlook, conditions certainly seem to be improving. Retail sales in the year through February accelerated to its fastest pace since 1997 (at 4.2 percent), indicating a badly needed recovery in domestic demand. Yet, the 0.5 percent drop in spending, steady 4.9 percent pace of unemployment and 0.9 percent drop in factory activity leaves room for concern.

Australia Dollar Receives another Boost from the RBA as Stevens Keeps Rate Speculation Stoked   

The speculative market has already priced in a significant premium in Australian lending rates over the coming 12 months. Therefore, the only thing (aside from a rise in risk appetite) that can keep the currency on the rise in consistently inflammatory commentary to boost the outook. RBA Governor Stevens provided just that this morning with inflation warnings that are eliciting expectations of 126bps of hikes through next year.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com


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