Euro Bulls Head For The Retirement Home. By Nicholas Hastings
Euro/dollar bulls should give up at this stage.
The Greek bailout they have waited two months for has finally arrived. But, it is hardly the model they had hoped for.
About the only reassuring part of the EUR45 billion European Union and International Monetary Fund one-year package is its size.
Its subsidized 5% price tag may look good, but it is still far from clear that subsidy will go down well in Germany when Angela Merkel tries to get it through parliament.
Also, what happens after the one-year deadline is up? Is Greece just left high and dry, having to start fresh negotiations again?
But, perhaps of even more importance is the lack of a conditionality clause. What does Greece have to do in return if it does actually draw on the funds? Let's face it, using the loan is just going to make matters worse for Athens as its fiscal deficit will be that much larger and pay-down schedule that much higher.
Adarsh Sinha and his currency strategy team at Barclays Capital also raise an important point for any Greek bond holders.
We all know that in the case of a default, the IMF's 'preferred creditor' status would ensure that it would get its EU15 billion contribution first off.
But, the question remains, would the euro-zone lenders demand a similar status and demand their EUR30 billion back before the common or garden holders of Greek bonds? If so, this could well color investor appetite for more Greek paper.
A limited recovery in Greece's credit default swaps, essentially the cost of insuring Greek debt, may already reflect some of these concerns.
The real market test will come later today, though, when Greece makes a EUR1.2 billion offering of notes maturing in up to one year. Financial markets will want to see that Greece can pay less for its money now that the bailout has been announced.
Of even greater importance may well be the $5 billion-$10 billion bond placing that the country also has planned for the U.S. market. That could well prove the acid test of just how far the bailout has succeeded in calming market fears of a Greek default.
The problem for the euro is that Greece is just the start.
Some argue that the bailout, which doesn't address problems elsewhere in the euro zone, will intensify pressure on other debtor peripherals--i.e. Portugal, Spain and Italy--to consolidate their fiscal positions.
In other words, the chances of the European Central Bank even contemplating tighter monetary policy will fall even more--ensuring that the euro continues to lose out in the yield stakes.
By contrast, strong U.S. data on Wednesday should help to make the dollar even more attractive on that level.
Fed officials may still be sending dovish signals for now, but hopes that the U.S. recovery is becoming more established will only be boosted by a rise in retail sales and signs of an upturn in inflationary pressure. Sales are expected to have risen 1.2% in March, accelerating from a 0.3% increase in February, and consumer prices are expected to have risen by 0.1% during the month after remaining flat in February.
So, despite the euro's initial jump to nearly $1.37 after the Greece bailout, the single currency is now more likely to resume its recent decline against the dollar, even heading back under $1.33 as it did earlier this month.
See the euro's limited bounce against the dollar:
Click Image to Enlarge
Early Tuesday, the euro crept a little higher against the dollar as investors wait for the results of the Greek auction, which given the small size of the offering should proceed fairly well.
The yen is the main winner, benefiting not only from an investor retreat back into safe havens but also from suggestions from the Bank of Japan Governor Masaaki Shirakawa that fears of a double-dip recession are fading and that further monetary easing may not be needed after all.
By 0745 GMT, the euro was up at $1.3609 from $1.3584 late Monday in New York, according to EBS. However, it was down at Y126.22 from Y126.67.
The dollar was also down at Y92.74 from Y93.26.
The Greek bailout they have waited two months for has finally arrived. But, it is hardly the model they had hoped for.
About the only reassuring part of the EUR45 billion European Union and International Monetary Fund one-year package is its size.
Its subsidized 5% price tag may look good, but it is still far from clear that subsidy will go down well in Germany when Angela Merkel tries to get it through parliament.
Also, what happens after the one-year deadline is up? Is Greece just left high and dry, having to start fresh negotiations again?
But, perhaps of even more importance is the lack of a conditionality clause. What does Greece have to do in return if it does actually draw on the funds? Let's face it, using the loan is just going to make matters worse for Athens as its fiscal deficit will be that much larger and pay-down schedule that much higher.
Adarsh Sinha and his currency strategy team at Barclays Capital also raise an important point for any Greek bond holders.
We all know that in the case of a default, the IMF's 'preferred creditor' status would ensure that it would get its EU15 billion contribution first off.
But, the question remains, would the euro-zone lenders demand a similar status and demand their EUR30 billion back before the common or garden holders of Greek bonds? If so, this could well color investor appetite for more Greek paper.
A limited recovery in Greece's credit default swaps, essentially the cost of insuring Greek debt, may already reflect some of these concerns.
The real market test will come later today, though, when Greece makes a EUR1.2 billion offering of notes maturing in up to one year. Financial markets will want to see that Greece can pay less for its money now that the bailout has been announced.
Of even greater importance may well be the $5 billion-$10 billion bond placing that the country also has planned for the U.S. market. That could well prove the acid test of just how far the bailout has succeeded in calming market fears of a Greek default.
The problem for the euro is that Greece is just the start.
Some argue that the bailout, which doesn't address problems elsewhere in the euro zone, will intensify pressure on other debtor peripherals--i.e. Portugal, Spain and Italy--to consolidate their fiscal positions.
In other words, the chances of the European Central Bank even contemplating tighter monetary policy will fall even more--ensuring that the euro continues to lose out in the yield stakes.
By contrast, strong U.S. data on Wednesday should help to make the dollar even more attractive on that level.
Fed officials may still be sending dovish signals for now, but hopes that the U.S. recovery is becoming more established will only be boosted by a rise in retail sales and signs of an upturn in inflationary pressure. Sales are expected to have risen 1.2% in March, accelerating from a 0.3% increase in February, and consumer prices are expected to have risen by 0.1% during the month after remaining flat in February.
So, despite the euro's initial jump to nearly $1.37 after the Greece bailout, the single currency is now more likely to resume its recent decline against the dollar, even heading back under $1.33 as it did earlier this month.
See the euro's limited bounce against the dollar:
Click Image to Enlarge
Early Tuesday, the euro crept a little higher against the dollar as investors wait for the results of the Greek auction, which given the small size of the offering should proceed fairly well.
The yen is the main winner, benefiting not only from an investor retreat back into safe havens but also from suggestions from the Bank of Japan Governor Masaaki Shirakawa that fears of a double-dip recession are fading and that further monetary easing may not be needed after all.
By 0745 GMT, the euro was up at $1.3609 from $1.3584 late Monday in New York, according to EBS. However, it was down at Y126.22 from Y126.67.
The dollar was also down at Y92.74 from Y93.26.
- 13 April |
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