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Euro May Rise Against US Dollar Amid Fading Greece Concerns, Risk Recovery

Euro May Rise Against US Dollar Amid Fading Greece Concerns, Risk Recovery

2010-03-08 05:34:00
Ilya Spivak, Sr. Currency Strategist

Key Overnight Developments

• Japan’s Current Account Surplus Tops Forecasts on Exports
• Dollar Down as Asian Stocks Rise on Friday’s US Jobs Report

Critical Levels

03082010 1

The Euro and the British Pound advanced against the US Dollar as Asian stock exchanges added 1.6 percent on average in overnight trade with investors responding to Friday’s better-than-expect US jobs report. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights

03082010 2

Japan’s Current Account Balance recorded a surplus of 899.8 billion yen in January, a reading significantly greater than the 783.9 billion economists expected, as exports surged 40.6 percent from the previous year. The effects of global fiscal stimulus efforts continued to drive overseas demand, with shipments to China rising at the fastest pace since 1985 while those to the US jumped 24 percent, the first annual increase in over two years. However, looking past percent-change readings, actual export volumes have recovered less than half of the decline from their peak in March 2008, hinting that the actual level of foreign demand remains decidedly lackluster compared to where it has been in recent years. Most worryingly, the increase in cross-border sales does not seem offer a recipe for sustainable growth considering the flow of stimulus cash will invariably dry up, an outcome that is likely to materialize sooner rather than later considering the widespread worries about public deficits that have taken root over recent months. Imports increased 7 percent, driven primarily by oil purchases. Separately, the Eco Watchers survey of merchant sentiment topped expectations, with the forward-looking Outlook index rising to the highest in seven months, likely reflecting the cautious improvement in employment seen in January’s labor-market figures.

Euro Session: What to Expect

03082010 3

Germany’s Industrial Production is set to rise 0.9 percent in the year to January – the first positive reading in 17 months – as output remains supported by the lingering effects of last years’ global stimulus measures on foreign demand for the country’s manufactured goods. While the outcome may not be particularly market-moving in its own right given the themes behind it have been priced in for some time, it certainly won’t hurt an environment that seems already supportive of a near-term rebound in the Euro amid tempered concerns about the Greek budget crisis. Indeed, Greek credit default swaps dropped 79.7 basis points last week to reach the lowest level since mid-January while an auction of 5 billion euro in 10-year Greek government bonds drew three times more bidders than necessary to absorb the number of securities on offer. Investors were reassured after Athens announced another 4.8 billion euros in austerity measures and as Germany (the natural leader of any bailout effort) threw their support behind the troubled nation’s efforts while “leaking” plans for a contingency plan to funnel 25-30 billion euros through western European state-owned banks should PM George Papandreou and company fail to get their own house in order.

Switzerland’s Unemployment Rate is expected to decline to 4.4 percent in February, marking the first decline in eight months. Meanwhile, Retail Sales are set to add 2.3 percent in the year to January, marking the second consecutive month in positive territory. While certainly encouraging, these outcomes are unlikely to prove necessarily supportive for the mountain nation’s currency. Indeed, as we noted in our weekly Swiss Franc outlook, traders’ attention is fixated on larger themes such as the receding threat of a default in Greece and a broad re-balancing of carry trade portfolios, exposing CHF to competing forces that is likely to yield a mixed performance against the majors.

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