FxPro Daily Forex Brief - The price of austerity
Monday, 13 February 2012 | 11:00
On the face of it, the vote to pass the latest austerity measure in Greece passed comfortably, 199 votes in favour with 74 against. But the political and social price has been high. Several cabinet ministers have resigned and violent protests have spread across the country. But as always, it’s a question of implementation of the measures which run to over 50 pages in the memorandum of understanding. We’re not home and dry yet however, with EU Finance Ministers set to meet on Wednesday to give final approval, together with the finalisation of the private sector involvement deal. It has to happen this week for it to be in place ahead of the March 20th Greek bond redemption. Once these elements are in place, markets will also be looking for signs for any signs from the ECB that it is prepared to play its part by forgoing the (eventual) profits on its holdings of Greek debt. Understandably, the single currency is not in the mood to celebrate this result, standing only marginally firmer vs. the USD during the Asia session.
Swiss policy alternatives looking more attractive. The latest inflation data make uncomfortable reading for the Swiss National Bank (SNB) and makes it more likely that the central bank will take another stab at trying to weaken the Swiss franc at some point in the not too distant future. The fall in the annual rate from -0.7% to -0.8% was broadly in line with expectations. In absolute terms, prices are now at levels last prevailing in September 2010. With interest rates effectively at zero the options for the SNB look pretty limited at first sight. Before the current cap was put into place, it’s understood that the authorities looked at a range of measure for containing franc strength, including capital controls and negative interest rates. As times goes on, it’s looking more likely that these will have to be put back onto the agenda. The issue at this point in time is that the SNB has done a good job in credibly holding its ground with regards to the current floor to EUR/CHF of 1.20. To move that higher would risk goading the markets into a tougher battle that the SNB may have a smaller chance of winning. Although we only have data up to November, there are few signs that the cap on the CHF has substantially deterred overseas investors. Sight deposits of overseas institutions are less than 2% lower when comparing September to November vs. the prior six-month period. Therefore, although there are a lot of factors determining investment flow as well as rates, on the face of it there are few signs that investors have been deterred by the potential for further intervention. Imposing negative rates for overseas deposits and/or capital controls could prove to be the more favourable route from here, with less scope for reputational disaster.
Dressing down for the gold bulls. In a devastating article penned for Fortune magazine, the Sage of Omaha delivers a withering critique of the gold bubble, one which ought to shake gold bulls to their very cores. According to the Chairman of Berkshire Hathaway, gold belongs to a category of investment that produces nothing, and one in which the investor buys the metal in the hope that someone else will pay more for it in the future. In order for the price of this type of asset to rise, an expanding pool of buyers is required. Therefore, when you buy gold you are essentially hoping that more and more people will buy gold in the future than have bought it before. In recent years, gold has performed very well because people have been frightened that paper currencies were rapidly being debased, an entirely legitimate fear. However, gold has two major shortcomings: – it is of no practical use (except for limited industrial and decorative purposes), and it is not procreative. Therefore, by owning gold you are assuming that the ranks of the fearful will expand, never a good rationale for making any investment. Buffett points out that the current stock of gold is around 170K metric tons and, at today’s price is worth a staggering USD 9.6trln. When investors fear currency collapse they rush for gold. If this fear diminishes then the demand for gold collapses. Should Europe get its collective act together and ultimately resolve Europe’s debt crisis, and if central banks desist from currency debasement, then the premise for holding gold will evaporate.
Pain relief for Portugal. Amidst the perma-pain of fiscal austerity, finally some reward for Portugal. In a meeting Thursday between the German and Portuguese Finance Ministers, the former suggested that there may be room to ease the terms of Portugal’s EUR 78bln bailout package, but only after the Greek situation has been clarified. Schaeuble remarked that Portugal had made good progress in implementing the various conditions contained in the bailout. The Portuguese 10yr yield is down another 20bp today at 12.87% - down more than 550bp in a little over 10 days. Suddenly, Portugal is out of the intensive care unit, although it remains in a critical condition, because it simply cannot afford these borrowing costs.
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