Thursday, March 31, 2011

Celtic (Paper) Tiger?

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By Mike Conlon | March 31, 2011

This morning the Euro has rocketed higher despite the fact that Ireland will release the results of its banks’ stress tests, which could show a more dire situation than previously thought. Once considered a shining light on the economic scene, Ireland has been reduced to the poster-child of the global economic bubble.

Yet the market is willing to push that aside as CPI data in the Euro zone came in slightly higher than expected, and traders are pricing in a rate hike at the next policy meeting in early April. Yet the ECB has a difficult task, as entering into a tightening cycle could prove disastrous for both Spain and Portugal who are fighting higher interest rates that are pushing them closer to a bailout.

Meanwhile here in North America, Canada will report GDP figures later this morning and in the US we will have another round of initial jobless claims data which as long as it stays in the 300s, should be seen as positive.

So this morning there is a bit of risk appetite, with commodities higher. Curiously, US stock futures are not higher so perhaps the market is waiting to see the jobless claims. There is still a lot of risk in the markets, so the slightest perception that things aren’t improving could reverse this recent up trend in a heartbeat.

In the forex market:

Aussie (AUD): The Aussie is mostly higher, reaching a new all-time high vs. USD at 1.036 earlier this morning. Retail sales figures came in slightly better than expected, though building approvals came worse than expected. A monthly gain was expected for building approvals which came in negative.

Kiwi (NZD): The Kiwi is also higher despite negative business confidence figures, though this is to be expected after the earthquake they experienced.

Loonie (CAD): The Loonie is showing strength this morning ahead of the GDP report as oil prices have eclipsed 105 again and risk appetite appears to be healthy to start the morning. (Click chart to enlarge)


Euro (EUR): The Euro is the big winner this morning despite the report expected from the Irish bank stress tests. Meanwhile, Portugal has missed its deficit target moving them one step closer to bailout, though German joblessness is the lowest it has been in nearly 20 years. Inflation though accelerated at its fastest pace in nearly 2 years, and the market is fully expecting a rate hike at the next meeting. This could push yields higher on the debt-laden countries, making it harder for them to service their debt. (Click chart to enlarge)


Pound (GBP): The Pound is mostly lower as the UK’s close ties to Ireland put them in a precarious position heading into the bank stress tests.

Dollar (USD): Dollar weakness has been the primary driver of markets of late and the “don’t fight the Fed” mentality has been in full effect. Initial jobless claims are expected to be still in the 300s, though it appears that risk appetite may be waning as the morning progresses. Tomorrow’s NFP will be a major market mover.

Yen (JPY): The Yen is flat to slightly lower, balancing its status as a safe-haven with the weakness inherent from the economic conditions due to the natural disaster.

I’ll keep harping on itâ€"there is still a TON of risk in the markets. I don’t feel that the risk of not gaining interest in the US should out-weigh the potential for another Euro collapse. The debt-stricken countries in the EU have not been provided with relief, and no solution to this crisis has been offered.

The amount of interest these countries have to pay is unsustainable and it is only a matter of time before someone walks away from the table. Germany is still taking a hard-line approach, as internal politics show that the bailouts are unpopular.

Yet they are attempting to force change on some of these regions as pre=conditions for bailout. One such change that they want is for Ireland to raise their corporate tax rate. This is the only thing Ireland has going for them economically so this would be a disaster for their economy.

How this plays out is anyone’s guess, but being Irish myself, I can tell you that they would be more likely to tell Germany to “shove it”, rather than capitulate.

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