European Crisis Deepens, Euro Higher

The European debt crisis is deepening as the Portugal government has fallen, Moody's follows-up the recent Spanish sovereign downgrade with a downgrade of 30 cajas.  European officials have also indicated that some key issues that we thought to be settled at the summit that starts today will likely be dealt with later, like funding for the ESM and Ireland,   There had been some reports that Portugal aid would wait until June, but the risk is much sooner.  Estimates based on projected financing needs for the next three years suggest a package of 70-80 bln euros may be necessary. 

And yet the euro's resilience is remarkable.  Yes it was sold from near $1.4220 yesterday and reached a low near $1.4050 earlier today, but it is come back quickly in Europe and the beachball underwater analogy comes to mind.  It is as if the market is focused on one thing:  super easy US monetary policy and the near certainty of an ECB ratre hike. 
  

In this light, the weak UK retail sales data today, growth forecasts in the budget, recent comments by Bean point to the BOE not hiking rates next month and this has seen sterling under-perform here.  Yet even here sterling is less than a cent lower on the weak and about 1% off the multi-month high recorded 2-days ago.   

Caandian dollar strength seems a bit counter-intuitive as well.   The government collapsed yesterday.  The funeral will be held on Friday with a formal vote of no confidence.  Leaders from all three opposition parties said they would vote for the motion.  The Conservative minority government will have to call elections and the early May period seems to be the most like timeframe.     The Canadian dollar's strength against the US dollar is not the only surprise, but that the Canadian dollar is outpeforming the European, which is somewhat unusual as the rule of thumb is that in a weak US dollar environment, the Canadian dollar loses ground on the crosses. 

The dollar is little changed against the yen.  The JPY80.50-70 area is thought to be of official or semi-official interest.   Volatility has been successfully sucked out of the yen this week following last week's joint intervention.