It is no secret that over the past 2 months, concerns about Greece have caused the euro to lose close to 10 percent of its value against the U.S. dollar. As much as we would have liked to start the new week on a more optimistic tone, especially following the European Union’s pledge last week to support Greece, concerns have not eased and may have exacerbated as regulators uncover swap operations that they weren’t aware of previously. As a result, the euro has weakened against the U.S. dollar for the fourth trading day in a row. Eurostat, the EU statistics office has given Greece to the end of February to disclose details on the currency swaps which may have been used to disguise holes in their balance sheet. These swaps do not break EU law but the goal of the swaps may have been to conceal large amounts of interest payments by moving them from the present year to the future and not to reduce the interest payments. The ECB has previously questioned the accuracy of Greek data and this new revelation has prompted rating agencies to also ask for clarification from Greece. All 3 of the major rating agencies downgraded Greece’s sovereign debt rating in December. Unfortunately Greece’s problems have snowballed as more skeletons come of out of the closet. With Eurogroup Finance Ministers meeting today and tomorrow, all eyes are still on Greece. Unlike the EU Summit last week, more specific details are expected to come out of this week’s meeting and the outcome will undoubtedly have a meaningful impact on the euro. Based upon the comments from the meeting, EU officials are gearing up for some sort of bailout because European officials continue to reassure investors that a default of a country within the Eurozone is unthinkable and that Greece will not be forced out of the Eurozone. The German Parliament went one step further to say that the EU can use an emergency clause within their treaty that would allow them to extend financial aid to Greece. Therefore it certainly appears that it will be just a matter of time before Greece receives a bailout – the only question is how much longer, will European officials make the euro suffer before stepping in. In the meantime, the German ZEW survey is due for release tomorrow and once again, the problems in Greece have dealt a major blow to investor confidence and we expect this deterioration in sentiment to be reflected in tomorrow’s report. There was no major Eurozone economic data released this morning but Switzerland released producer prices which revealed that inflationary pressures increased last month with PPI rising by 0.3 percent.
U.S. DOLLAR: QUIET TRADING DAY
The markets are extremely quiet today which is not surprising considering that U.S. traders are off enjoying a 3 day weekend in observation of President’s Day. There was no U.S. economic data released this morning and no noteworthy events that happened overnight. However the action will heat up tomorrow with the Empire State manufacturing survey, the Treasury International Capital flow report and the NAHB housing market index due for release. Although the big event this week will be the release of the Fed’s Treasury International Capital flow report on Wednesday, the Empire State survey is one of the first measures of manufacturing activity to be released in February. Despite the strength of the U.S. dollar, manufacturing activity is expected to improve. Foreign demand for dollar denominated assets is also expected to have increased towards the end of last year as risk aversion sent investors into the safety of the U.S. dollar. For the most part, the U.S. dollar has held onto its gains against all of the key currencies and further strength will be contingent upon how the Greek saga unfolds and whether the Fed’s minutes echo Federal Reserve Chairman Ben Bernanke’s recent hawkishness.
GBP: BREAKOUT IMMINENT
For the seventh trading day in a row, the British pound remained contained within a1.5535 to 1.5775 trading range. With each passing day, a breakout appears more and more likely as the trading range for the currency pair begins to contract. With a heavy economic calendar this week that includes a number of market moving events including inflation, employment and consumer spending data, we have sufficient catalyst to trigger a breakout. Consumer prices are due for release tomorrow and the market is anticipating a decline in price pressures from the previous month and a rise in inflationary pressures on a year over year basis basis. We believe that the odds favor stronger inflationary pressures despite the Bank of England’s recent warning that inflation could undershoot their target this year. Producer prices rose by the most on an annualized basis since 2008 due to rising costs for oil and scrap metal. Although producers will not necessarily be passing on all of their higher prices to consumers, they will be passing on some. Don’t forget that the Value Added Tax in the U.K. was also increased in January which has also led to higher prices. The British Retail Consortium has already reported that prices at shops rose 2.3 percent last month, the strongest pace of gains in prices of everything expect for food since at least December 2006. Stronger numbers from the U.K. this week could trigger an upside breakout in the GBP/USD. Meanwhile according to U.K. property site Rightmove, the average price of a home on the market increased 3.2 percent, the largest rise since April 2007. Despite a weak economy, the housing market is booming, particularly in London where the average cost of a home sold rose to the highest level since they started to keep records in 2002.
NZD: SERVICE SECTOR GROWTH SLOWS
The New Zealand, Australian and Canadian dollars are virtually unchanged today as the absence of U.S. traders is felt across the currency markets. New Zealand was the only commodity producing country to release economic data overnight and according to the latest report, growth in the service sector slowed in the month of January with the index falling from 54.4 to 53.1. Yet the slower pace of growth does not draw away from the fact that the services industry expanded for the third consecutive month. The growth of new orders, sales and supplier deliveries decreased but employment increased while stocks and inventories remained unchanged. New Zealand producer prices are due for release this evening and like many other parts of the world, higher commodity prices are expected to boost inflationary pressures. The Reserve Bank of Australia will also be releasing the minutes from their most recent monetary policy meeting where they surprised the markets by leaving interest rates unchanged. The tone of the report and what they telegraph about future monetary policy actions will be a big factor in how the Aussie trades this week. The NAB business conditions report is also scheduled for release alone with comments from RBA Assistant Governor Guy Debelle who could attempt to shed more light on the central bank’s monetary policy stance. Finally from Canada, manufacturing shipments are expected to have risen strongly in the month of December.
JPY: GDP GROWTH BEATS EXPECTATIONS
Despite stronger than expected GDP numbers and the lack of U.S. economic data, the Japanese Yen failed to stage a broad based rally. The Yen only managed to rise against the euro, British pound and Swiss Franc as the Australian and New Zealand dollars advanced against the Yen while the greenback remained unchanged. After experiencing zero growth in the third quarter, the Japanese economy grew by 1.1 percent in Q4 thanks to a recovery in exports. On an annualized basis, this brought GDP growth up from 0.0 percent to 4.6 percent. For the first time in seven quarters, corporate capital investments increased as a 5 percent rise in exports encouraged capital expenditure. Consumer consumption also rose thanks to government incentives. Yet the lackluster reaction in the Japanese Yen may be linked to the market’s concerns about whether the growth is sustainable especially on the heels of Toyota’s problems and China’s tightening measures. In the meantime, no economic data is due from Japan this evening.
EUR/USD: Currency in Play for Next 24 Hours
The EUR/USD will be the currency pair in play on Tuesday. Aside from more comments expected on Greece, the Eurozone will also release their ZEW survey at 5:00 AM EST or 10:00 GMT. This will be followed by the U.S.’ Empire State Manufacturing survey at 8:30 AM EST or 13:30 GMT and the Treasury International Capital flow report at 9:00 AM EST or 14:00 GMT.
After breaking down in mid January, the EUR/USD has remained comfortably within the sell zone, which we determine using Bollinger Bands. As long as the currency pair does not break out of the Sell Zone, the downtrend remains intact. A series of lower highs suggests that further losses are possible. If the EUR/USD breaks below the psychologically important 1.35 level, the next major area of support is not until 1.3200, the 23.6 percent Fibonacci retracement of the 2008 sell off in the EUR/USD that took the currency pair from its all time high above 1.60 to a low of 1.2330. On the other hand, if the EUR/USD manages to close above1.3750, the downtrend would be invalidated, opening the door to a further recovery.