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A day after Athens was choked with tear gas, Trichet is out rattling his cage on the need to raise rates as he wants to leave vigilant legacy and Euro makes new local high. Today is also the last day of the quarter and of QE2.
The very complex French rollover "solution" to Greece's debt woes is the new immediate focus, now that the majority of Greek parliamentarians voted in favor of the austerity package and if we assume the formal ratifying process goes smoothly today. The debate on whether rollover solution is good or bad for Greece is certainly contentious, with the interesting GDP-linked interest rate one of the key features that will likely guarantee that the interest rate never proves particularly high, because austerity and the structure of the Greek economy virtually guarantee that the Greek GDP won't be growing any time in the next few years.
Still, while the theory of the rollover plan may be compelling for some due to its extension of payments over a long time frame and the GDP linking that will mean easier terms as the Greek economy wallows in an endless slump, others are out suggesting the plan is not so generous, and more importantly, that the rollover process presents risks and unpleasantness, most notably Deutsche Bank's CEO Ackermann, who discusses his views in an FT article. One of the more interesting subjects he brings up is that there is "no transparency in risk sharing", as there is confusion on this rollover on whether it will constitute a default according to the CDS authority, as banks like Deutsche have likely insured their debt holdings on the CDS market. Elsewhere, FTalphaville, in a post today quotes a Citi analyst who breaks down the mix of investors in Greek debt and wonders how many will participate in this purportedly all voluntary plan Greek debt, EUR 76+ billion of which is maturing "by 2013" according to that blog post.
Meanwhile, logic tells us that the EuroZone project and its sovereign debt issues are still very much a concern and that the Greek vote and the rollover plan have done little to allay the medium term fears that the situation could still deteriorate. Outside of Greece, Italy is going through discussions on extensive fiscal belt-tightening in the coming years, as its own fiscal situation has come increasingly into focus. The embattled Berlusconi is circulating a plan that would cut EUR 47 billion in spending over the coming few years and supposedly bring the budget gap down to about 3.9% of GDP this year and eliminate it entirely by 2014 (no doubt assuming some robust growth figures….).
But someone is very interested in keeping EUR stronger, and that someone may just be China, which has shown a strong interest in bidding up peripheral debt and perhaps the Euro as well in the interest of preserving the stability of the Euro for the sake of its exports and for the sake of reserve diversification. A Wall Street Journal article from late yesterday (Chinese Largesse Supports Euro, but for How Long?) suggests as much and draws conclusions about where the money China is getting from its US treasury sales is going: into the Euro.
The Euro got an additional boost today, as Trichet apparently thinks things are so close to being back to normal that it's time to trot out arguments for raising the interest rate again, since it is too accommodative in his view and the "risks to price stability are on the upside." It appears Mr. Trichet wants to leave office (he is to be succeeded, most likely by Bini Smaghi, in October) with a bang and to have it written in his legacy that he wasn't afraid to show strong vigilance at all times - even in June 2008 or now, when it seemed so very odd/misguided to do so…
In short, the sharp rally in the EURUSD doesn't alter the longer term view of the EURUSD or EURGBP, where we suspect the Euro could remain seriously challenged by its sovereign debt situation, though the short term visibility has been reduced by this latest market move . Let's see how we are trading in the middle of next week, a few days after we get over the hump of the end of the month, end of quarter, and end of QE2 and on the other side of a three day weekend in the US. In EURUSD, the 0.764 Fibo is still in place (around 1.4550) and even today, if EURUSD fails to close above the 1.4440 area convincingly, one can say that the more local attempt at a range break has been rejected. But we'd still prefer to wait a few days before drawing any technical conclusions.
Chart: EURUSD
EURUSD has come all the way back from the false break through the rising line of consolidation from Monday and almost challenged the descending line of consolidation today. The next resistance areas above that are the 0.764 retracement around 1.4550 followed by the 1.4695 high for the month of June. To the downside a strong close back below 1.4440 today or tomorrow would take some of the oomph out of the recent move and could mean that the pair is set to remain in the lower 1.4100-1.4400 range for the short term.
USDJPY survived the test above the key resistance area (Ichimoku daily cloud) as broad USD weakness is outweighing the normally JPY-weakening effects of the sharp move higher in interest rates yesterday, perhaps due to the nervousness surrounding the end of QE2 today and the reasons behind the weak US treasury auctions this week, i.e. yields too low given the at least a touch of worry on the US sovereign debt front (though it's a tough to argue that sovereign challenges are greater in the US than in Japan - the more clear and present danger of the debt ceiling process is what may be occupying the market's shorter term attention span). Watch out for the raft of Japanese data out in Asia's Friday session tonight, though the Tankan survey is too infrequent to judge how sentiment is evolving more recently after the Japanese earthquake and tsunami tragedy.
Odds and ends
The pound continues to suffer on the enthusiasm for Euro buying and as UK confidence slipped in June after a bounce in May. The recent rhetoric shift in the BoE and reinvigoration of perceived BoE QE potential will likely see the pound weaker any time risk appetite is on the mend as it has been over the last three days.
US jobless claims were out at an elevated level once again, coming in at 428 and keeping the six week average of claims above 425k, a number that suggests an outright rise in the unemployment level in the US. So far, the unemployment rate has only increased by 0.3% from the trough in the rate in March at 8.8% to 9.1%, but is likely to increase more in the next couple of months if these readings remain above 400k. The June US employment report will be released next Friday.
Looking ahead
Watch out for the last of the major US regional manufacturing surveys up shortly in the form of the Chicago PMI ahead of tomorrow's ISM manufacturing for June. Also watch out for the Fed's Bullard, the purported mastermind of QE2, who will be out speaking shortly on the subject of QE.
More importantly, as we discussed ad nauseam lately is to consider that today is the end of quarter/month/QE2 and therefore a significant chronological pivot point.
Economic Data Highlights
New Zealand May Building Permits out at +2.2% MoM vs. +3.2% expected and -1.2% in Apr.UK Jun. GfK Consumer Confidence out at -25 vs. -24 expected and -21 in MayJapan Jun. Markit/JMMA Manufacturing PMI out at 50.7 vs. 51.3 in MayAustralia May RPData-Rismark House Price Index fell -0.3% MoM vs. -0.4% MoM in Apr.New Zealand Jun. NBNZ Business Confidence out at 46.5 vs. 38.3 in MayAustralia May Private Sector Credit Growth out at +0.3% MoM and +3.1% YoY vs. +0.4%/+3.2% expected, respectively and vs. +3.3% YoY in Apr.Japan May Housing Starts rose +6.4% YoY vs. +3.1% expected and +0.3% in Apr.UK Jun. Nationwide House Prices out at 0.0% MoM and -1.1% YoY vs. 0.0%/-1.3% expected, respectively and vs. -1.2% YoY in MaySweden May Household Lending out at +6.9% YoY vs. +7.2% in Apr.Germany Jun. Unemployment Change fell -8k vs. -17k expected and -8k in MayGermany Jun. Unemployment Rate out unchanged at 7.0% as expectedNorway May Retail Sales out at +1.6% MoM and +7.7% YoY vs. +0.5%/+10.2% expected, respectively and vs. +11.4% YoY in Apr.EuroZone Jun. CPI Estimate out at +2.7% YoY vs. +2.8% expected and +2.9% in MayUS Weekly Initial Jobless Claims out at 428k vs. 420k expected and 429k last weekUS Weekly Continuing Claims out at 3702k vs. 3690k expected and 3714k last weekUpcoming Economic Calendar Highlights (all times GMT)
US Chicago PMI (1345)US Weekly Bloomberg Consumer Comfort Index (1345)US Fed's Bullard to Speak on QE (1400)US Jun. NAPM - Milwaukee (1400)US Fed's Hoenig to speak (1700)Australia Jun. AiG Performance of Manufacturing Index (2330)Japan May Overall Household Spending (2330)Japan May Jobless Rate (2330)Japan May National CPI (2330)Japan Q2 Tankan surveys (2350)China Jun. PMI Manufacturing (0100)Australia May HIA New Home Sales (0100)China Jun. HSBC Manufacturing PMI (0230)View the original article here
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