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Euro Hits Monthly Low, May Extend Losses on Greece Woes and Soft Economic Data

Euro Hits Monthly Low, May Extend Losses on Greece Woes and Soft Economic Data

2010-03-24 06:00:00
Ilya Spivak, Sr. Currency Strategist

Key Overnight Developments

• Japan’s Trade Flow Trends Favor Dollar Gains vs Euro, Pound
• NZ Current Account Deficit Widens on Foreign Firms’ Profits


The Euro dropped 0.6 percent against the US Dollar and touched a one-month low against a trade-weighted basket of major currencies on rumors that Germany and France agreed to bring in the IMF into a Greek bailout effort (see below). The British Pound slid 0.5 percent against the greenback. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.


Japan’s Merchandise Trade Balance surplus grew to 651 billion yen in February from a revised 63 billion in the previous month, as exports grew at the fastest pace in 24 years while imports fell short of expectations by 3.5 percentage points. Overseas sales added 45.3 percent from the previous year as shipments to Asia (and China in particular) led the way once again with a 53.6 percent annualized increase in export volume. More interestingly however, sales to the US trailed at a very close second with a gain of 47.1 percent – the biggest in at least eight months – while those to the European Union lagged with a meager 15.5 percent increase.

The spread between Japanese exports to the US and the EU had been steadily narrowing since 2006 but the trend began to break down in the second half of last year, pointing to a sluggish recovery in demand from the common market relative to that of the States. A survey of economists polled by Bloomberg predicts the US real GDP growth will outpace the top economies in the EU by an average of 1.5 percentage points this year and in 2011, hinting the transition will continue. On balance, this means Japan – which runs a trade surplus with both the US and the EU – will accumulate an increasingly large amount of USD relative to EUR and GBP. Japan is the world’s second-largest holder of FX reserves, so the makeup of their holdings can have a very significant impact on exchange rates. On balance, this suggests that future trade flows are likely to favor US Dollar gains against the Yen, Euro and the British Pound.

New Zealand’s Current Account Balance deficit widened sharply more than economists expected, printing at –NZ$3.57 billion versus forecasts calling for a print at –NZ$1.6 billion in the fourth quarter. The shortfall is expected to have shaved 2.9 percentage points off the economy’s overall output in the three months through December 2009. The disappointing outcome owed to a sharp deterioration in the capital account, where the gap widened by NZ$2.7 billion to the largest since the second quarter of 2008 as foreign-owned companies’ profits (which are counted as a debit against the current account since the money is marked to overseas firms) surged NZ$3.84 billion, the most in a year.


Advance estimates of German Purchasing Manager Index figures are expected to show that the pace of manufacturing expansion in the Euro Zone’s largest economy slowed for the first time in 14 months. The EZ-wide version of the metric is set to show a similar result, showing the first decline in the sector’s growth rate since February 2009. Most manufacturers cater to overseas demand, with the rebound in industrial output over recent months reflected in surging export readings over the same period. Indeed, overseas sales were crucial to lifting the currency bloc out of recession in the second half of last year, outpacing the contribution of domestic consumption to overall output by nearly a full percentage point. To that effect, softening manufacturing PMI readings imply weaker exports and consequently sluggish economic growth in the months ahead as fiscal stimulus is withdrawn amid increasing concerns about public deficits while domestic consumption remains lackluster with region-wide unemployment still near record levels. Germany’s IFO Survey of business confidence promises to be no more encouraging as an index tracking firms’ economic expectations holds flat at 100.9 in March, amounting to the first time the metric fails to increase in 14 months.

The batch lackluster economic data will be issued against a backdrop of eroding confidence in the common market after France and Germany were reported to have struck a deal to back the inclusion of the IMF in any efforts to bail out cash-strapped Greece, according to an anonymous official in the German Finance Ministry that was quoted by Bloomberg News. The announcement comes just a day before EU leaders descend on Brussels to mull over rescue plans for the beleaguered southern European economy. Anything short of a decisive European plan supporting Athens in the aftermath of the summit – including a scheme involving outside help from the likes of the IMF – would likely have severe negative implications for the Euro and risk appetite at large, showing that the world’s largest economy is unable to keep its own house in order. Indeed, the single currency dropped to the lowest level in a month against a trade-weighted basket of its major counterparts in Asian trade, with more of the same likely ahead

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