Key News
* Strong Euro Causing Chaos (Telegraph)
* Greece’s Credit Rating Cut to A2 by Moody’s on Debt (Bloomberg)
* Existing Home Sales Rise to Highest Level Since 2007 (Bloomberg)
*U.S. Economy Grew at 2.2% Annual Rate Last Quarter (Bloomberg)
The Event Agenda
Afternoon Run-Down
The dollar continues its climb. USD/JPY reached its highest levels since October after the Bank of Japan Governor said they intend to keep interest rates near zero to fight deflation. The yen has now lost 8% to the dollar in just 18 trading days.
Final third quarter GDP in the UK disappointed. The consensus expectations were for a 0.1% contraction. The actual number was 0.2%, for a year over year decline of 5.1%. The UK has yet to emerge from recession even as its major economic counterparts have. Since concerns about Greece have emerged in recent weeks, the pound has been lagging the recent weakness in the euro as traders have used the opportunity to sell euros against everything, including the pound. But the pound is now catching up, breaking below 1.60 overnight against the dollar … and trading through its 200 day moving average.
Greece sovereign debt was downgraded overnight by Moody’s, but just one notch. A more severe downgrade would have threatened the collateral value of Greek government bonds used to secure loans from the European Central Bank. The euro is trading at new three-month lows this morning.
Despite the weaker than expected final third quarter GDP out of the U.S. this morning, the dollar remains bid and the Treasury market continues to price in a rosier picture for economic recovery. The spread between 2yr and 10yr Treasury yields reached record levels yesterday, signaling expectations for a stronger economic turnaround ahead.
Here’s a look at some key charts….
Key Charts
US 2-yr/10-yr Yield Spread
British Pound
The pound broke below its 200 day moving average. The next key level of support comes in at the October lows of 1.5708.
Euro
The euro is closing in on its 200-day moving average of 1.4181. The 61.8% retracement of the nine month uptrend comes in at 1.3484.
Australian dollar
The Aussie dollar continues to fall following last week’s disappointing GDP report and the RBA’s indication that they are done normalizing rates.
New Zealand dollar
The kiwi (NZD) and the Aussie have had equivalent declines in percentage terms since mid November (down 6.8% vs. the dollar). Given New Zealand’s fundamental weakness relative to Australia, the current break through prior multi-month lows, in the chart below, should open up a faster decline for the NZD.
Chinese Yuan
China’s central bank chief comments sent the yuan (non-deliverable forward market) to nine month highs after highlighting a focus on the country’s international balance of payments. The market is now pricing in a 2.7% move higher in the yuan over the next twelve months.
{ 1 comment… read it below or add one }
About your recent article on the Euro – EMU collapse.
Dear Mr Rich,
Should California leave the US dollar currency area (the most political currency area in the world) because of its bankruptcy State debt?
Otherwise, should Texas or Alaska establish their “oil” currency (like Persian Gulf countries), when facing a $ 150/barrel oil again?
What about Missouri, Louisiana, Mississippi, the “third world” US states?
Should they adopt their devaluated “Mexican Gulf” currency, in order to gain competitiveness?
This is exactly what you are saying when talking about the EMU infeasibility.
In 1995 almost none, outside Italy, was convinced of the Italian ability to enter the EMU since the beginning.
A great economist as Rudiger Dornbush said in 1997 the EMU couldn’t ever succeed.
The strict Maastricht rules forced a sudden an unexpected change in fiscal policy of the most indebt countries. So EMU succeeded.
When Euro went down in the late ’90, euro-skepticals were saying “Do you see? EMU is failing”.
Nowadays, a strong Euro is bringing the same euro-skepticals to say “Do you see? EMU is failing”.
The market is simply taking account of what was and is happening.
About the future, let’s remember this please:
USA, UK and Japan have the most fast-growing fiscal deficit
USA has the greatest foreign debt and trade deficit
Moreover USA has quite an impressive unemployment rate
Japan has the most aging population and no immigration
USA and UK have the most indebt consumers
USA real estate troubles aren’t gone yet
Compared to those situations EU and EMU is definitely less sick man!
Thank you for your attention.
Best regards.
Rosolino