March 29,2013

While Cyprus is no longer scary

The question: Was it the canary?

That warned of collapse

Or was it, perhaps,

Just nothing but cause to be wary


On this Good Friday morning, markets are extremely quiet.  Tokyo was open last night but much of the rest of Asia was closed.  Most of Europe is closed as well and it is both a stock and bond market holiday here in the US, although banks and the Federal Government are open.  It should be no surprise that the FX markets are extremely quiet, with very modest movement overall.  The capital controls in Cyprus prevented rioting in the streets, but it seems pretty clear that the level of concern amongst depositors throughout Europe, especially in the periphery, has increased.  Slovenia is the next country in the market’s cross hairs, with serious fiscal issues, a number of banks that failed the ECB’s stress tests and no long history of protecting its citizens against the likely demands of the Troika should things go down that road.  Certainly, if I were a depositor in a Slovenian bank, I would be reconsidering where I was keeping my money.  (Personally, given how difficult it will be to rhyme with Slovenia, I am hoping things there stay out of the limelight).  That said, the euro is marginally higher as we have seen a continuation of position covering into the holiday weekend.  I anticipate that we will see a resumption of the euro’s decline as the new quarter begins, if only because the economic data there continues to be dire.


In Japan last night, data showed inflation (well deflation) was worse than expected, falling to -0.7% in February, and IP actually fell 0.1% rather than the 2.5% rise forecast.  This simply highlights how difficult it will be for the Abe administration to achieve their goals.  The people of Japan have become ingrained with the idea that prices fall amid their stagnant economy.  It leads me to believe that the BOJ, when it meets next week, will be more aggressive than the market is currently expecting.  And that bodes ill for the yen.  I expect that we will retest the highs in USDJPY next week, if not break them after the BOJ announcements.


Remarkably, we have data this morning, with Personal Income up 1.1% and Personal Spending up 0.7%, both much better than expected.  The PCE Deflator was a bit softer than expected at 1.3%, which simply allows the Fed more room to maneuver.  I am finding it harder to believe that inflation is running at 1.3% or even 2.3%, as my observations of spending shows that prices are going up all over the place.  Whether it is the price of lunch, the tolls on the NJ Turnpike, or the cost of clothing, nothing is falling and all are higher than last year by more than 2%.  And when I think about the price of housing, which has been rising at better than 8% for the last year, it is very difficult to accept the governments numbers as an accurate gauge of prices.  I still believe that the Fed will run into its 2.5% inflation limit before we get to 6.5% unemployment, and that is going to change the flavor of markets greatly.  But that is not something to see until the end of this year or early next, so for now, the Fed remains totally in charge.


Commodity currencies continue to gather interest because they remain fiscally stable and offer an alternative to investors who are becoming concerned about the euro again.  Commodity prices, the few that traded, were mixed overnight, but generally we have seen stronger energy and weaker metals prices.  That would argue for CAD to outperform AUD, and I guess we have seen that over the past week.  But overall, this space should remain in good shape compared to the euro, yen and pound for the time being.


Finally, EMG currencies have shown little activity into the holiday weekend.  China fixed at a stronger than expected 6.2689, but there was very little movement elsewhere because of the holidays.  The Korean Peninsula seems to be hotting up a bit, with the North making some more inflammatory statements, but most commentators seem to think it remains directed at the domestic audience there, rather than an actual prelude to war.  I hope they are right.


I will be on vacation next week, but return the morning of April 8.


Have a wonderful holiday and good luck next week


March 28, 2013

In Cyprus, with doors opened wide

The banks there now brace for the tide

Of people who need

More cash just to feed

Their families who’ve suffered and sighed

G3 – It has been a pretty uneventful session despite the reopening of the Cypriot banks this morning, or perhaps because of that.  The euro has rebounded slightly from yesterday’s levels which appears more to be driven by short covering into the Easter holiday weekend than any fundamental story.  In fact the data from Europe was somewhat mixed, with German Unemployment climbing slightly, by 13K, while Retail Sales there were up 0.4% (exp -0.6%).  So some good news and some bad news left traders to their own devices ahead of the US data onslaught.  We continue to hear about the nature of the capital restrictions in Cyprus, which are both fairly draconian and uncertain as to their tenor.  The initial word is that they should only be in place for one week, but it seems likely that they will be extended.  Because it seems pretty clear that once they are lifted, all foreign depositors will be exiting the country with whatever they can carry.  While I continue to believe the prospects for the euro are looking worse, given the nature of the move we have seen the past several sessions, it is no surprise to see a little buoyancy in the currency this morning.  If I were a receivables hedger, I would look to take advantage of euros above 1.2800.

Governor Kuroda was back testifying last night, this time to the Upper House of the Diet, and said the same thing he has been saying, the BOJ will do “whatever it takes” to achieve the mandated 2% inflation target and his timeline remains two years.  This includes expanding and extending the current QE program and they are willing to consider other measures as well.  However, the market has heard this story before and market reaction was muted. We continue to see yen repatriation by Japanese exporters, but as tonight is year end for most companies there, I expect that flow will stop shortly.  A weaker yen remains in our future, remember that.

The pound has been the least interesting of the big 3 currencies this morning with modest reaction to slightly weaker than expected Housing price data, and no interest from the asset allocators who are back to fleeing the euro.  Until we see a change in either the economic situation in the UK or a better economic outcome on the continent, neither of which seems a likely near term occurrence, it will be tough for the pound to rebound past recent highs.  In fact, I expect that we will see a move back toward 1.50 and below over the coming weeks.

US data today showed GDP revised up to 0.4% (exp 0.5%), and Initial Claims jumping to 357K (exp 340K), but the market response has been lacking.  We get Chicago PMI later this morning, (exp 56.5) but quite frankly with the holiday upon us (tomorrow is both a bond market and stock market holiday), it is hard to believe that we will get much movement later today.  Look for a quiet one.


CommCurr – Aussie has been under a bit of pressure this morning as it appears we are seeing short term traders liquidate their recent long positions.  Remember, Aussie has been outperforming for a while, and as we head into the long holiday weekend, with both Friday and Monday a holiday in many countries, lots of traders are looking to close things for the weekend.  CAD, on the other hand has had pretty decent performance, which many observers are calling a response to the strength in energy prices we have seen the past several sessions.  While that certainly had an impact, I continue to believe that the bulk of recent CAD strength was merely a reaction to its former relative weakness.  I have liked CAD all year, never understanding the recent move toward 1.0350, and perhaps my longer term views are starting to bear fruit now.  I don’t see a reason for CAD to go anywhere near 1.05, especially with the energy complex performing well, and so CAD payables hedgers should be considering the benefits of adding to positions here.


EMG – Asia saw a bit of a whipsaw in price action, what with North Korea cutting its final communication lines to the South and China imposing further controls on lending for second homes and other banking activities.  But given the broad dispersion of positions in this space, there is not likely to be a concerted move in one direction across the board.  In LATAM, the central bank of Brazil was active yesterday, selling more than $1 billion into the market and knocking spot back about 1%.  That movement has continued at the margin this morning, but unless they return, and that is not expected, I would think that 2.00 is going to hold for a while longer yet.  MXN, meanwhile, is rebounding from its recent peak, but again, this appears to be positional rather than fundamental.  Long MXN remains one of the favored trades in the market these days, and it has been performing well, so any bounce right now in USDMXN is likely to be short lived and shallow.  For receivables hedgers, leaving bids at comfortable levels seems the best game plan. For payables hedgers take advantage of any rallies in the dollar for now as they are likely to be fairly short term.


Good luck





March 27, 2013

In Europe they’re feeling more pain
Officials there still show disdain
For hard working savers
Who don’t want their favors
But simply their lives to maintain

G3 – The headlines this morning have all been about the same thing: just what kind of precedent has the Cyprus situation set with regard to individuals keeping the wealth they have earned over a lifetime.  While in the past, we have seen less developed countries, notably Argentina and Venezuela, confiscate state pension funds and central bank reserves to fund their programs, this is the first time we have seen a nation confiscate personal deposits to pay their debts.  And that has people in Spain, Portugal, Italy and other highly indebted nations in Europe quite uneasy.  It is why there was a joint press conference today by French President Hollande and Spanish PM Rajoy reiterating that the Cyprus situation was specific to the situation in that country and had no implications for France or Spain.  We have heard the same from Luxembourg, Slovenia and a reiteration of the same from the Dutch FinMin, Dijsselbloem, who started the whole conversation yesterday with his comments about Cyprus being a template.  Of course the euro has other problems, like the downward revisions of GDP growth in Spain (-1.5%) and Portugal (-2.3%) as well as the further rise, to a 16-year high, of Unemployment in France to 3.18 million.  Add it all up and it is no surprise that the euro has fallen further overnight and seems headed lower still.  In fact, the movement has been much more aggressive than I would have expected, but I guess that is a testament to just how unhappy global investors are with the ongoing theatrics in Europe.  I had been advocating euro receivables hedgers to act for the past several days, and this is what had me worried.  Germany’s austerity measures are being implemented throughout Europe, and the process is becoming an increasing burden on the peripheral nations, which historically have never behave in this manner and don’t know how to manage their economies accordingly.  The euro has further to fall, and while it won’t be in a straight line, it will be pretty steady.

In Japan, there was an article last night about just what the BOJ will be doing when it meets next week.  PM Abe reiterated that it was incumbent on the BOJ to be more aggressive in achieving the 2% inflation target.  The article mentioned that the unlimited bond buying, which had been slated for 2014, will be brought forward and that maturity extension is in the cards.  These are all from the Fed QEternity playbook and should be no surprise, but until the market sees the actual announcement next week, it seems that traders are reluctant to jump on the short JPY bandwagon from here.  Remember, too, that Friday is FY end in Japan, so we are witnessing a great deal of JPY repatriation ongoing and that is helping support the yen for now.  But once we are in April, that repatriation will end, and I expect to see JPY weaken a bit more aggressively next week.

In the UK, the news was of the increased capital requirements of the major banks, announced by the BOE.  However, it is “only” £25 billion rather than the £50 billion that was expected by analysts and this has helped the pound hold up vs. the euro, although it is lower vs. the dollar.  UK data showed GDP for Q4 remained at the first estimate of -0.3% and Retail Sales, according to the CBI, was marginally better than expected.  However, the weak growth story is still dominant, not least for the PM and his coalition who are struggling to get the economy back on track.

Today’s US data is secondary and shouldn’t have any impact, but there are a number of Fed speakers today, including Evans, Rosengren and Kocherlakota, all on the dovish side of the spectrum.  Further euro drifting seems to be the best bet for the rest of the day, unless the equity markets really sell of sharply, at which point I would expect a sharper euro decline.

Today’s Technicals

Currency           Support 2         Support 1         Resistance 1     Resistance 2

EUR                 1.2680              1.2735              1.2885              1.2960
JPY                  93.960              94.40                95.15                96.15
GBP                 1.5050              1.5080              1.5210              1.5280

CommCurr – These currencies have been benefitting from the weakness in the euro as traders are selling the euro against both of these currencies in increasing numbers.  If you recall, we saw these positions last year during the Greek crisis when investors were concerned about the euro existentially.  It seems those existential fears may be reasserting themselves, hence the interest in owning both AUD and CAD which are relatively better managed on a fiscal basis and have economies that respond to the two key growth engines in the world, China and the US.  Nothing has changed with my longer term views at this point, but if the euro concerns continue, I will have to reevaluate my weaker AUD position.  Today, CAD is outperforming, but that continues to be catch up for previous, unwarranted in my view, strength in the AUD.

Today’s Technicals

Currency           Support 2         Support 1         Resistance 1     Resistance 2

AUD                 1.0420              1.0440              1.0500              1.0530
CAD                 1.0100              1.0140              1.0240              1.0265

EMG – Most of these currencies are suffering today alongside the euro, with only PHP, which had its credit rating raised to investment grade by Fitch, and IDR, which was a minimal move driven by relative value position unwinding.  But otherwise, all these currencies are weaker, with CZK the leader, down almost 0.90%, but PLN and HUF also quite weak.  This is the general fear of markets combined with proximity to the epicenter of the issues, notably Cyprus.  And LATAM is opening softer across the board, with MXN giving up a small amount of its recent gains, and BRL just gradually declining at the central bank’s behest.  For today, as long as markets are concerned about Europe, I would look for these currencies to stay weak.

Good luck


In Cyprus, things still are a mess
The Troika said, “Here’s what we’ll bless”
The bondholders trust

Preserve it we must

Deposits now 10% less!