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