EUR/USD has come under further pressure during the European session with Van Rompuy (president of the EC) saying that the EU is at a “turning point” in the crisis. An ambiguous statement if ever there was one. I’d say at best the EU is driving round in circles with a right turn to an exit highly likely to lead to a cliff and a drop down to the rocks below.
Let’s talk about Greece very quickly (again). The markets are turning their attention away from the Hellenic state (I think every person on the planet knows the Greek situation is not going to turn out well with an implosion or a further bailout in 6 months, a year, two years, five years inevitable). So, where is the markets attention drawn to? Why, of course, what we said months and months ago, Spain and Portugal, in no particular order.
The Spanish economy is already suffering from ludicrous levels of unemployment and are now struggling with budget discipline in the face of an accelerating downturn. They’ve been asked to make deeper cuts with a 0.5% cut in GDP from the 2012 budget. Although commentators and officials (ahem, European, with
no self-interest and completely impartial of course) said that the Greek debt situation was ‘unique’ I’m far from convinced. If we look at the Portuguese bond markets, they’re rated as junk by the ‘big three’ – Moodys, S&P and Fitch. Portugal’s 10 year bonds were trading at a 47% discount to face value on Friday with its 10 year debt yields at 13.71%. Granted, it’s a slight improvement from the record high in January of 18.29% however it’s not really inspiring much confidence or indicating sustainability. Of course, all the same
noises are being made that happened at the outset in Greece – “Austerity measures are on track” etc etc.
Here’s something to think about. The Portuguese Government would need to run a primary budget surplus (excluding debt payments) of almost 2% of GDP. It’s achieved that three times in 17 years. Portugal may need to follow Greece in a debt restructuring. Spain and Italy are interesting cases though. Here’s something to think about, in my own simplistic way of putting things. Greece couldn’t pay their bills when they were due so they gained/demanded a debt relief to get back on track. Now, Spain and Italy, financially, will not ‘need’
to follow this route out of necessity as Greece had to. However, the Spanish and Italian voters/politicians etc may look at the debt relief and think we’ll have some of that and write off some of their debt. The threat about losing access to ‘credit markets’ doesn’t hold as much weight as it once did.
GBP/EUR has recovered some of its ground and is now above the 1.19 level. I’m a little bored with this pair – it’ll trade between 1.18 and 1.20 and not move much further. If you’re a buyer of EUR in the next two weeks I’d put orders in at 1.1950/1.20 and at a push 1.2050. It’s been a mixture of Sterling strength (UK trade balance deficit narrowed in January) and a ‘wait and see’ market view till the FOMC meeting in the US session.
GBP/USD has come right off from below the 1.60 level last week. Where does it go now? I’d suggest it’s dependent on the EUR/USD pair however as I stated in January I think this will be a year of USD strength. The first two months we’ve seen a relatively weak dollar however as the US fundamentals continue to strengthen (look at last week’s improvement in Feb’s ISM Non-Manufacturing Index) and not forgetting the +227k jobs created during the same period as demonstrated by the Non Farm figure last week I expect Dollar strength to continue. Are you a buyer of USD? I’d seriously consider covering off some of your exposure and ‘hedging’ yourself as I believe we’ll see GBP/USD under the 1.50 this year. If you’re off the opposite view to me then it’d still be wise to ‘average your rate upwards’ to protect yourself just in case.
The FOMC meeting will give us the monetary policy statement however not many surprises are expected and no change in the rate of 0.25% will be announced. This will be the main market driver in the US session however we also have Retail Sales (MoM) (Feb) and business inventories (Jan) released.
As an aside, looking at GBP/JPY there’s been a bout of Yen weakness this morning so if you need to purchase Yen anything above the 1.29 level looks good value to me as I think we’ll see this slip back into the 1.27’S again.
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