There once was a nation called Greece
Its creditors it loved to fleece
But German elections
Mean euro injections
Will for the time being increase
“Greece is on the right track in many ways, but there have been delays in some areas,” German Finance Minister Wolfgang Schaeuble told reporters after a meeting with euro-area counterparts in Brussels yesterday. “It is right to proceed on a cash-on-delivery basis and step by step and make the disbursements as Greece’s financing needs arise.”
Let me translate the above comments from Bloomberg for you into plain English: “Greece is failing miserably in implementing its promised programs. However, until Chancellor Merkel is re-elected with a sweeping majority in September, we are happy to spend other country’s money to prevent the crisis from exploding onto the front pages and risking the Chancellor’s victory.”
Some may deem me too cynical, but as I wrote yesterday, Greece has failed on every aspect of the program and yet as I forecast, the Troika was willing to put up more money. The most likely rationale is that Merkel is buying her election with EU money. And the EU is willing to pay for it. To me it begs the question, what happens if they are successful at preventing any major blow-ups and Merkel is reelected? Will they let Greece go afterward? What about Portugal? Or Cyprus? After all, Merkel will have 4 years for the Eurozone to escape whatever nightmares arise before she next faces the electorate. That should be enough time to get things back in order, and probably on a more stable long-term footing. This is the crux of my underlying bearishness for the euro. I believe it is dawning on the European intelligentsia that despite all their best intentions, the differences between Northern and Southern European nations are too great to be bridged by a single currency. While there has been an extraordinary amount of capital, both political and monetary, invested in this project, it was doomed from the start and I continue to believe that Greece will be the poster child for its mistakes. A six-year long depression has not been sufficient to shake them loose, but bankruptcy should do the job. And so once again I say to receivables hedgers, the road ahead leads to 1.20, not to 1.30, so take advantage of the levels that remain available. Yesterday it was German IP that was weak; today the French showed a growing deficit; Italian and Portuguese governments continue to stumble and there is no rescue in sight. While Signor Draghi is doing all in his power, the diminishing returns of verbal intervention are beginning to show. And it seems pretty clear he doesn’t have the mandate to actually execute QE.
This morning the pound is weaker again, falling to its lowest level in 3 years after weaker than expected IP data was released (-2.3% Y/Y) led down by weaker than expected Manufacturing data (-2.9% Y/Y). This simply adds to the impact of BOE Governor Carney’s promise to ignore inflation and keep rates low for an extended period. Why the pound has even weakened vs. the euro in the past several sessions, and quite frankly, that is difficult. So the UK recovery is being called into question and the BOE is all-in for further monetary policy ease. The pound will have a great deal of difficulty rallying at all during the next several months in my view, and we could well approach 1.40 again before this decline is over. Now for those with a long view, buying pounds at 1.40 tends to be a very good deal. But I see no reason to jump in right now to catch the proverbial “falling knife”.
Meanwhile, the yen continues to trade around 101 as the Upper House election approaches. I continue to believe that with an LDP win in 2 weeks time, the yen will start its next leg lower. After all, I continue to look for US Treasuries to fall, and yields, both nominal and real, to increase their spread vs. JGB’s. Japanese investors are going to be increasing their purchases, especially at the 3.0% Treasury level, and in order to do so, they will be selling yen more aggressively. The yen move, which has corrected over the past two months, is getting set to accelerate again. 110 here we come!
Both Aussie and Canada have been range trading of late as they get buffeted by commodity price swings, growth estimates in their key markets of China and the US respectively, and the idea that one of the critical features in their respective rises was the fact that yield hungry investors were looking for low-risk alternatives to US Treasuries. But with Treasury yields rallying, those investors are becoming much more comfortable back in USD. While I continue to believe that Aussie will underperform the Loonie, both should decline slowly from here.
And finally, a quick peek at the emerging markets shows that over the past week, only MXN and RUB have been able to hold their own vs. the dollar. Otherwise, the weakness in this sector has been widespread and pretty robust, with many currencies declining more than 1%. The global dynamics are changing as the US and China continue to change their domestic policies. Commodity producers are suffering and will suffer further. Exporters to China will suffer, and beneficiaries of hot money flows will suffer as these policies adjust. This pretty much defines the entire emerging market space, so it should be no surprise that these currencies are under pressure and will continue to be so. There will be differences between those countries with better fiscal situations (C/A surpluses and low debt), but they are all going to fall for now. And that doesn’t even take into account the propensity for protest and revolution that we are beginning to see spread, which will only add further pressure. If you are selling into the emerging markets, hedge those revenues!