Monday, June 27, 2011

One Last Hurdle?

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By Mike Conlon | June 27, 2011

This week will hopefully put an end to this round of the Greek debt crisis on Wednesday, when it is expected that Greece will vote to accept the austerity measures agreed to in principle last week. However, there is still some risk that this is not a done deal until it actually passes, despite the confidence vote last week. If accepted, then they will receive the bailout money early next week.

One of the other forces putting pressure on the markets is the end of QE2 and the accompanying de-leveraging. Risk assets have been moving lower as Dollar strength due to both risk aversion and a natural reversion to mean take place. Debate here in the US over the raising of the debt ceiling is likely to drag out all summer, which could have an impact of interest rates if this becomes a political showdown.

This week will bring UK GDP figures tomorrow which may show a stagflationary environment if they come in lower than expected. Business sentiment has picked up though which means that expectations are improving.

In New Zealand, trade surplus figures came in lower than expected, which combined with a little unwinding of carry trades has pressured the Kiwi lower.

So the market is starting the morning flat to slightly higher, with oil prices lower to $90.50 and gold just above $1500. Personal consumption data is due out later this morning but is likely to show declines.

In the forex market:

Aussie (AUD): The Aussie is mostly lower as the de-leveraging of risk assets is causing some selling. There’s not a lot of news this week out of Australia so expect the Aussie to trade on risk themes.

Kiwi (NZD): The Kiwi is lower across the board after trade surplus figures came in lower than expected, coming in at 605M vs. an expected 1000M on lower exports and higher imports.

Loonie (CAD): The Loonie is lower as oil prices have retreated to $90.50 on the news of the release of the strategic oil reserve (SPR). Wednesday will be the release of CPI data in Canada which is expected to come in at 3.3%, which is a tad high so anything higher may increase rate-hike expectations. GDP figures are due out on Thursday. (Click chart to enlarge)


Euro (EUR): The big news this week for the Euro zone is the Greek vote on austerity but CPI data is due out on Wednesday, followed by the German unemployment report of Thursday. The Euro is mostly higher this morning to start the day.

Pound (GBP): The Pound is mixed this morning as a business barometer index came in better than expected, posting its highest reading in nearly a year. Expectations of rate hikes remain on the table, but tomorrow’s GDP report could show a stagflationary environment if worse than expected. (Click chart to enlarge)


Swissie (CHF): The Swissie is mostly lower as the safe haven play is muted despite the general de-leveraging in the market.

Dollar (USD): The Dollar is showing some strength today despite personal income and spending figures that came in slightly lower than expected. With the removal of the guiding hand of QE2, it will be interesting to see how the correlations in the market behave.

Yen (JPY): The Yen is weaker across the board as Dollar strength has caused a shift in money flows for carry trades.

The general theme in the marketplace is that interest rates need to move higher to combat global inflation according to the BIS (Bank of International Settlements). Should rates begin to rise, there could be a deflationary backlash as the cost of money increases.

Without the artificial hand of the Fed keeping US rates low, our debt problem may become worse if the market demands higher interest. The debt ceiling debate may induce further volatility as the market loses confidence that we can get our act together.

While the debt ceiling will likely be raised, expect high drama as the politics interfere with the economics. Also bear in mind that the Greek debt crisis may be done deal, but isn’t over until it’s over. Fears of contagion to the other PIIGS countries could be a problem if rates continue to rise or if someone else decides they want another bailout as well.

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