Monday, June 20, 2011

No Easy Solution!

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By Mike Conlon | June 20, 2011

Just as quickly as the “breakthrough” was reported in the Euro zone last Friday, we wake up to the reality that indeed the complicated process of handling the Greek debt crisis is far from a done deal. This morning the global markets have opened lower as risk aversion is pervasive.

One of the key issues affecting this crisis is the confidence vote the current Greek government is facing tomorrow, and the ECB’s concerns that Greece won’t be able to enact the austerity measures that it needs to in order to receive the next bailout payment.This is leading to a situation where people are starting to realize the enormity of the problem and the near impossibility that this will end well. So the ECB is taking a “wait and see approach” to determine if they are just throwing good money after bad at Greece.

IN the UK, home asking prices came in higher than expected, showing signs that the inflation they have been seeing may be more than just higher food and energy prices that everyone around the globe has been seeing. Wednesday’s release of the BOE rate policy meeting minutes will show if they are becoming more concerned about their inflation and more importantly stagflation.

In Japan, exports came in worse than expected, though this should not be a surprise as it has become difficult to gauge the economic data as result of the natural disaster.

So stocks and commodities are lower to start the day, with Dollar strength leading the way.

In the forex market:

Aussie (AUD): The Aussie is lower across the board on risk aversion and the minutes from the RBA rate policy meeting will be released tomorrow. Should commodities prices continue to fall throughout the summer, then inflation may become less of a concern.

Kiwi (NZD): The Kiwi is slower as well after manufacturing activity came in slightly lower than expected. With Asian stocks lower overnight, demand for the Kiwi has lessened.

Loonie (CAD): The Loonie is mixed despite the risk aversion in the markets and oil trading back to a 91 handle. Overnight weakness in Asia and Europe have made the Loonie a more “desirable” commodity currency. Retail sales figures are due out tomorrow.

Euro (EUR): Meetings galore this week for EU Finance Ministers and the confidence vote in Greece tomorrow dominate the headlines. Rumors of a potential downgrade to Italy’s debt also means that contagion is a major issue and that they are running out of time to find a solution. (Click chart to enlarge)


Pound (GBP): The Pound is somewhat higher despite the risk themes as the Rightmove Home Index came in showing that asking prices for homes have risen. This means that inflation may be broader than had been previously thought, and the release of the BOE rate policy meeting minutes on Wednesday may confirm those fears.

Swissie (CHF): The Swissie is stronger across the board as its safe haven qualities are in demand by the markets. Trade balance figures are due out on Thursday which may show the effects of the strength of the franc on the Swiss economy.

Dollar (USD): The Dollar is mostly higher on risk aversion to start the morning. Wednesday’s FOMC meeting will let us know where the Fed stands on the economy. Existing home sales are due out tomorrow and are expected to show declines.

Yen (JPY): The Yen is somewhat mixed despite the risk aversion to start the day as Japanese exports came in lower than expected. The market was expected a decline of 8.4, but the figure came in showing a decline of 10.3.  (Click chart to enlarge)


Right now the markets are dominated by the Greek debt crisis and will continue to be until there is further clarity in the situation. While no one wants to see a Greek default, everyday that goes by brings us closer to that reality.

The Greek people know that this is not a bailout for them, but rather for the banks that lent their government money. So it is no surprise that they have taken to the streets to protest. Tomorrow’s confidence vote will be an important decision, for if the ECB and the IMF are not convinced that Greece will accept the austerity measures, then default may be imminent.

I’m surprised to see the Euro rally back to 1.43 this morning and to actually have moved higher, as the markets may be discounting the gravity of the situation.

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