USDCHF broke above 0.8198 resistance, and reached as high as 0.8276, suggesting that a cycle bottom had been formed at 0.8082 on 4-hour chart, and the fall from 0.8525 had completed. Further rally could be seen after a minor consolidation, and target would be at 0.8400-0.8450 area. Initial support is at 0.8160 and key support is at 0.8082, only break below these levels could trigger another fall to 0.8000 zone.
The Greek economic crisis continues to make headlines as Prime Minister George Papandreou attempts to maneuver the governments contentious “austerity” bill through the Greek parliament. As predicted, protests against the government’s plan to deliver nearly 30 billion euros in spending cuts and tax hikes have grown in intensity and the fear is that the debt crisis will not be contained within Greece’s borders. Portugal’s credit rating has been reduced to “junk” status and Europe’s banking system is dangerously exposed to massive amounts of questionable debt. The very future of the Eurozone hangs in the balance.
A Default by Any Other Name
In late June, European Union officials announced they were close to arriving at a solution that would see in excess of 100 billion euros made available to Greece. The plan includes a provision to “roll-over” a percentage of the debt owed to investors. Innocuously described as a “re-profiling” of Greece’s debt, the intent is to give Greece a little more breathing room by delaying the payout on maturing securities for those investors willing to wait for full payment.
This scheme was well received and even actively promoted by the major financial institutions in France. This enthusiasm is understandable when you consider that public and private banks in France alone have nearly 57 billion euros invested in Greek bonds and other government debt. German financial institutions are also heavily invested with 34 billion euros at stake and they too – albeit somewhat grudgingly – agreed to roll-over a portion of the maturing debt. Being forced to wait for full payment is obviously preferable to taking a loss.
While the European banking system may have given the plan a thumb’s up, the ratings agencies were not so inclined. Standard & Poor’s issued a statement confirming that, in their opinion, a deferment was just another type of default event. Accordingly, the ratings agency would be obliged to downgrade Greece’s debt rating to reflect the default.
This introduces a series of complications, not the least of which is the fact that this designation would make Greece’s debt ineligible as collateral for the European Central Bank. This alone would derail the proposed debt-relief plan as Greek bonds are expected to backstop loans from the Central bank. A “default” status would make it impossible for the bank to accept the bonds as collateral.
European Contagion
While French and German banks are two of the more prominent foreign holders of Greek debt, other European financial institutions also have significant exposures. The fear is that should Greece default on its payments, it could trigger the collapse of these institutions thereby spreading contagion throughout the European banking system.
This concern was highlighted by a pronounced sell-off in debt issued by the PIIGS (Portugal, Ireland, Italy, and Spain) following the June 5th action by Moody’s Investors Services slashing Portugal’s credit rating to “junk”. All eyes may be on Greece right now but there is a strong likelihood that history will repeat itself as other debt-strapped nations come face to face with their own economic crisis.
July 19 (Bloomberg) — Bloomberg’s Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks rose, sending the Standard & Poor’s 500 Index to its biggest rally since March, as President Barack Obama endorsed a bipartisan deficit-reduction plan and International Business Machines Corp. spurred the largest technology advance in a year. Bloomberg’s Pimm Fox also speaks. (Source: Bloomberg)
The Bank of Canada held its target for the overnight rate steady at 1.00%; also holding the Bank Rate at 1.25% and the deposit rate at 0.75%. The Bank commented in its statement: “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2.0 percent inflation target. Such reduction would need to be carefully considered”.
Meeting minutes from the last monetary policy meeting for the Riksbank shows the Executive Board is ready tighten interest rates further should inflationary pressures fail to subside. This would likely lead to gains in the Swedish krona but the SEK remains pressured due to events in Europe.
The Swedish central bank indicated it would stand ready to tighten interest rates again should inflation expectations fail to dissipate and if wages continue to rise. The Riskbank increased the repo rate by 25 bps at its last policy meeting on the 4th of July and the repo rate now stands at 2%. Investors have priced in another two interest rate increases for later this year given the market’s implied forward rate.
However, Sweden’s central bankers did leave themselves an out of the latest tightening cycle of Sweden’s monetary policy as an easing of the interest rate may be necessary given the slowing of the US economic recovery. A deterioration of public finances in Europe is also a risk for the Swedish economy. Liquidity for Swedish banks has noticeably tightened in markets for the krona, euro, and US dollar.
A positive note for the Swedish financial system came from the European banking stress tests which were released last Friday. The examination showed the Swedish banks of Nordea, Handelsbanken, SEB, and Swedbank all passed with Teir One capital above the 5% requirement as administered by the European Banking Authority.
While rising interest rates are typically a catalyst for a currency the Swedish krona is susceptible to a downturn in risk sentiment. This type of price action is predominant in the EUR/SEK with the pair rising amid market tensions over the European debt crisis and falling with the “risk-on” trade. Initial resistance at 9.2700 has held the most recent move higher but a break above this level would likely take the pair to the October and November highs near 9.4260. To the downside the July low at 9.0540 is the next pivot lower.
Read more forex trading news on our forex blog.
It was no surprise this morning that the economic sentiment reports from the ZEW were in below market expectations. Declines in consumer confidence are seeping across boundaries and dragging overall economic sentiment lower as the euro zone region grapples with rampant debt concerns.
The ZEW (Zentrum fur Europaische Wirtschaftsforshung), an agency which issues surveys and analyzes consumer confidence, economic sentiment and other statistics, published its latest findings for Germany and the broader euro zone today. The reports revealed slightly better than forecast results for the broader region, but a severe downturn for Germany. Risk aversion may be growing as a result, and the EUR is therefore likely to see some further downtime this week.
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Contributor article by www.taipanpublishinggroup.com.
As the debt ceiling debate heats up, President Obama claims most Americans are OK with higher taxes. Are you?
As the U.S. debt ceiling deadline moves closer, the bond market takes it in stride. The 10-year U.S. Treasury note trades within spitting distance of eight-month highs.
Investors seem confident a deal will get done, if only because the consequences for a miss would be so dire. Republicans and Democrats are playing a fierce game of “chicken” — driving their cars straight toward each other at full speed — but one or both will swerve at the last second.
And while the bond market itself is relaxed, the rhetoric is getting heated. From TheHill.com (emphasis mine):
President Obama on Friday kept up the pressure on Republicans to agree to revenue increases in a deal to raise the debt ceiling, claiming 80 percent of the public supports Democrats’ demand for tax increases.
“The American people are sold,” Obama said. “The problem is members of Congress are dug in ideologically.”
Throughout the press conference, Obama blasted Republicans for ignoring what he said is the will of the American people by rejecting tax increases that would balance out spending cuts in a debt package.
It is not clear where the POTUS got his numbers. According to Rasmussen Reports, a polling agency, the stats are quite different:
Just 34% think a tax hike should be included in any legislation to raise the debt ceiling. A new Rasmussen Reports national telephone survey finds that 55% disagree and say it should not.
There is a huge partisan divide on the question. Fifty-eight percent (58%) of Democrats want a tax hike in the deal while 82% of Republicans do not. Among those not affiliated with either major political party, 35% favor a tax hike and 51% are opposed.
For your editor, two very important questions remain unanswered here:
For those who do not want a tax hike, it is reasonable to mark the difference between (1) spending money on useful goods and services and (2) throwing it down a rat hole. Washington is all too skilled at the second option. Haven’t we had enough of that?
Those who fiercely oppose higher taxes are criticized as shortsighted and irresponsible. The dangers of blowing the debt ceiling, they are told, should concentrate the mind and elevate it above partisan bias.
But what about the long-term dangers of continuing to spend like drunkards? The burdens placed on children and grandchildren?
Then the other question remains, “Higher taxes for who?” And what about the entities that benefited from hundreds of billions to trillions worth of bailouts — the voracious eaters of taxpayer funds in the first place?
In the grand scheme of things, there is a canyon-like divide between big business and small business. Big business is on the side of Washington and Wall Street, where the cash and benefits gush handsomely. Small business is on the other side, where dust-bowl conditions persist.
It is no accident that unemployment numbers remain high under this arrangement. Historically, small business accounts for half of economic production or more, and virtually all the net new job creation. Large corporations, as important as they are, tend to be net reducers of jobs as they find ways to go about their business more efficiently.
Should it be any surprise, then, that systemically funneling tax breaks and bailout cash to the “big boys,” while making middle-class taxpayers and small businesses foot the bill, is a losing proposition on the whole?
On one level, the whole system seems crazy. On another level it makes perfect sense — if you look at it through a purely Darwinian, “survival of the fittest” type lens.
When government is the source of largesse and handouts, those who count as “fit” are the ones closest to the power center, and thus best enabled to milk the system. Those furthest from the power center — middle-class consumers and scrappy small businesses — are the scrawny cash cows being milked to the last drop.
At the end of the day, there is another, even more important question to answer: “How do we stop the blackmail?”
The massive financial system bailouts, in which hundreds of billions were stealth-transferred to the banks, came about as a form of blackmail. “Save the system or the economy gets it.” With the debt ceiling debate, the same logic applies. “Let us keep borrowing or the economy gets it.”
The catastrophe threat has merit. No one wants to see the global financial system suffer yet another paralyzing heart attack. (Or at least, very few do.)
But at what point does one say “enough is enough” when it comes to corrupt and irresponsible behavior, in which the crimes only get bigger and the threats only get worse? How many future debt ceilings are we going to raise? How many stealth bailouts and manipulated currency debasements are we going to endure, without ever tackling the true problem — the wasteful and corrupt nature of our spending in the first place?
Written by Justice Litle for Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.
July 19 (Bloomberg) — Stephen Davies, chief executive officer of Javelin Wealth Management Ltd. in Singapore, talks about the outlook for Asia stocks. Davies also speaks about negotiations between the White House and congressional leaders over the federal debt ceiling and Greece’s debt problems. He speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)
July 19 (Bloomberg) — Joseph Capurso, a currency strategist at Commonwealth Bank of Australia, discusses the outlook for the euro and his recommendation for the New Zealand dollar. Capurso, speaking from Sydney with Mark Barton on Bloomberg Television’s “First Look,” also talks about Australian monetary policy.
July 19 (Bloomberg) — Piyush Gupta, chief executive officer of DBS Group Holdings Ltd., southeast Asia’s largest bank, talks about the health of Asia’s financial industry and economies. Gupta speaks in Hong Kong with Susan Li, Rishaad Salamat and John Dawson on Bloomberg Television’s “Asia Edge.” (Excerpt. Source: Bloomberg)
