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Euro Leads Major Currencies Lower on Rumors Greece to Seek IMF Aid

Euro Leads Major Currencies Lower on Rumors Greece to Seek IMF Aid

2010-03-18 06:37:00
Ilya Spivak, Sr. Currency Strategist

Key Overnight Developments

• Japanese Large Manufacturer’s Survey Points to Jobless Recovery
• New Zealand Consumer Confidence Down for Second Month in March
Euro Leads Majors Lower on Rumors Greece Will Seek IMF Aid

Critical Levels

03182010 1

The US Dollar recovered in overnight trade as the Euro led major currencies lower with a 0.5 percent drop against the greenback. The single currency retreated as traders digested a Dow Jones article quoting a senior Greek official as saying that the rift between the administration in Athens and that of Germany is widening, with Prime Minister George Papandreou set to seek IMF aid to help his country deal with its gaping budget shortfall over the Easter weekend. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights

03182010 2

Japan’s BSI Large Manufacturing index gained 4.3 percent in the three months through March, showing sentiment among manufacturers with capital of at least 1 billion yen improved for the third consecutive quarter, albeit by a substantially smaller margin than in the previous two periods. The survey revealed expectations of further slowdown in the second quarter but a significant pickup starting in the second half of 2010. Perhaps most significantly, large firms’ employment projections suggest they will continue to scale back labor forces through the third quarter, hinting that any pickup in sales is unlikely to see significant spillover into domestic wages, spending and consumption. This suggests Japan will continue to rely on exports and thereby on overseas stimulus spending to drive economic growth, a dangerous position for the world’s second-largest economy considering the growing broad-based concern about public deficits and waning appetite for additional expansionary policy.

New Zealand Consumer Confidence fell 1.5 percent from the previous month in March, marking the second consecutive decline according to a survey from ANZ National Bank Ltd. Most disturbingly, the decline was driven by weakness in the forward-looking portion of the survey as stubbornly rising unemployment trims incomes and weighs on spending. The jobless rate rose to a decade high at 7.3 percent in the fourth quarter and is expected to continue higher at least through the beginning of 2010 according to a survey of economists conducted by Bloomberg.

Euro Session: What to Expect

03182010 3

The Euro Zone Current Account surplus is likely to narrow in January after German exports fell 6.3 percent over the same period, marking the first decline in five months. Germany is the Euro Zone’s largest economy and its leading international trader, so a decline there is likely to bring region-wide metrics along a similar trajectory.

Switzerland’s Trade Balance is expected to narrow to 2.2 billion francs in February after surging to 2.4 billion in the previous month on the back of a 3.2 percent monthly increase in exports. Looking past month-to-month volatility however, overseas sales have failed to mount a sustained recovery since snapping a five-year uptrend in December 2008, with export volumes treading water now for over a year. Exporters account for 53.4 percent of the overall economy and well over half of them depend on demand from the Euro Zone, hinting that a sustained recovery in cross-border sales as well as overall growth is unlikely until the currency bloc is able to find firmer footing. Industrial Production figures reasonably mirror the same outlook considering most Swiss manufacturing is geared toward foreign consumers. Indeed, although output is expected to gain 5 percent in the fourth quarter to mark the largest increase since the three months through June 2008, production levels have recovered barely a quarter of the 17.1 percent decline from the middle of 2008 as the global recession gripped the mountain nation.

UK Mortgage Approvals at six of the nation’s top lenders are expected to rise to 54,000 in February, but the conditions in the real estate market may not be as encouraging as the headline figure would suggest after house price surveys from Rightmove Plc and the Royal Institution of Chartered Surveyors (RICS) revealed weakness as tepid demand falls short of new supply. In fact, the increase in the loan books of the largest lenders may be linked to their increased market-share after smaller rivals perished in the credit crunch, so the metric may not be indicative of an overall increase in property-seeking borrowers.

On balance, traders are likely to look well past the economic calendar as risk aversion dominates price action with the issue of Greece’s budget deficit jumps back into the spotlight, leading the safety-linked US Dollar and Japanese Yen higher against the spectrum of major currencies.

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