Thursday's Musings

Currency in Crisis
The euro has seen its recent losses extended as the news stream from Europe is poor, even though Spanish and French bond auctions were well received.  Concerns about the dragging out of the Greek negotiations undermines the euro which has now fallen about 2.5% since Feb 9 and has traded below $1.30 for the first time since January 25. 

It has retraced about half of the short-covering rally off of the $1.2625 low on January 13th.  A break of the $1.2970 could spark another quick cent decline.   Yet the very short-term technical indicators suggest the likelihood of a bounce in the North American morning that may prove a better selling opportunity.  Resistance is seen near $1.3050. 

The Greek tragedy is spinning into a farce.  Greece has proposed new 325 mln euro in savings, signed assurances and the Troika has apparently completed its sustainability report and yet a deal is not in hand.  The newest obstacle, but in some ways, always present, is that the creditor nations are concerned about implementation. 

Indeed, the hold up presently is that the creditor nations are looking to tighten up the surveillance through specific mechanisms, apparently to be finalized.  The take away from these developments are two-fold.   First, a growing number of officials from the creditor nations are growing more confident that a hard default by Greece can be absorb.  This coupled with the next LTRO pending may embolden their demands.

Second, the injury and insult will leave its own scars even while steps are being taken to increase integration and coordination.  Italy's Monti, who is emerging as an important voice, tempering Germany, while Sarkozy has consistently been outmaneuvered by Merkel and now is basing his re-election on part on his good relations with Germany, illustrates this larger point.  He attributed some responsibility of the crisis to the softening for the fiscal rules by previous German and French governments themselves. 

Ironically, Germany, Finland and the Netherlands now appear to prefer to wait for after elections to make new commitments, while previously a technocrat government was thought to be essential for a resolution.  The next key date is Monday when the euro zone finance ministers are to meet. 

Elsewhere in Europe, note that Sweden's Riksbank cut rates 25 bp to 1.50%.  It cut the 2012 GDP forecast in half to 0.7% from 1.3%.  There were two dissents who wanted a larger cut, but the statement suggests the bar is high for another cut.  The central bank expects the 1.5% repo rate to be the average until 2013.  

The larger than expected decline in January inflation (-0.9% vs -0.5% consensus) has been taken aboard, but it appears that growth variables are more important than inflation data if the odds future cut are to increase.  The krona is slightly weaker than the euro, but it continues to trade like a high beta euro--moving in the same direction but more so. 

Australia reported better than expected jobs data and this reduces the chances of an RBA cut next month after disappointing the market earlier this month by not cutting.  Job growth was more than 4x more than the consensus had forecast at 46.3k.  Full time jobs rose by 12.3k, which alone beat consensus.  Still the bulk of the jobs created were part-time.    For its part, the Australian dollar is trading softer and we note that its correlation with the US stock market is considerably higher than the euro's and is more stable.  The 60-day rolling correlation (on percent change) is just below 0.88, while the  euro's correlation with the S&P 500 is just above 0.62. 

Finally turning to the US, the most interesting data today is not the PPI (which will likely show easing pressures) or the weekly initial jobless claims (where the 4 week average is at a new cyclical low).  Rather it is the housing start and permits data.  Multi-family units has been one of the few less dim elements, but single family permits have increased for three consecutive months.  Something does seem incongruous as the market overall remains difficult, but home builders are becoming somewhat more optimistic, according to recent surveys and home builder shares have rallied strongly in recent weeks.   
Thursday's Musings Thursday's Musings Reviewed by Marc Chandler on February 16, 2012 Rating: 5
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