FxPro Daily Forex Brief - Risk of Greek default looms large
Wednesday, 18 January 2012 | 10:29
There are mixed reports as to the fate of the deal with private sector creditors of Greece. Bloomberg reports that negotiators are near to a deal, equivalent to 32 cents per euro. In contrast, there are reports in the UK press (The Independent) that some investors are still blocking a deal in order to negotiate a better outcome. Even if a deal is done it is hardly the case that Greece would be in the clear with regards to a more stressed default further down the line. The situation depends on the pressures on Greek banks, together with the size of any upfront payment demanded by private sector bond-holders. Combined with the current fragility of the talks, this means that there remains a decent chance that Greece will default before the end of the current quarter.
Further softening in China property prices. No great surprise to see the latest data on property prices showed a further softening in December. New home prices in the four major cities declined for a third consecutive month. This follows on from other data recently, which showed prices falling for the fourth month in a row. The government has undertaken several measures designed to take the heat out of property speculation, such as substantially increasing the deposits required for second home purchases. The data suggest these moves are having an impact, but the trick is to prevent a slowdown from turning into a crunch.
Another powerful euro short-covering rally. On three occasions since the start of last week there have been powerful short-covering rallies in the single currency which have imposed pain and suffering on all of those record short positions amongst the trading community. Yesterday’s jump from a low of 1.2650 to a high of 1.28 is the latest episode, and once again it is difficult to pinpoint any real trigger for the move. Indeed the euro is now not that far from where it was trading prior to the commencement of Friday’s S&P credit rating-downgrade rumours. The single currency has managed to recover despite the now distinct likelihood that Greece will default before too long as well as the scathing criticism of a draft of the fiscal compact from an ECB board member. Euro shorts will be taking note of the inability of the single currency to sustain sell-offs on bad news.
Burden of responsibility in Europe lacks a home. Some fairly strong words from Italian PM Monti in the FT yesterday, which when combined with the EFSF downgrade, increase the perception that the burden of responsibility has no shoulders to rest on in Europe. In sum, he feels he’s done his bit and there will be a “powerful backlash” from voters if there is not more help from the EU and Germany to lower Italian borrowing costs. Monti feels he was given support by the S&P statement of last week (Insights blog 16/01.12 “No berating the ratings agencies”), which singled out European policymaking and political institutions for not being as strong as called for by the crisis. Whether using S&P’s criticism of the EU strengthens his case is another matter. However, against the backdrop of the EFSF downgrade, Monti’s words do fuel the debate about where and by whom the heavy lifting should be done. There appears to be little appetite to increase the funds available to the EFSF, something which could allow it to regain its AAA rating (i.e. increasing the over-collateralisation). As such, the ECB is increasingly being seen as the only effective backstop, at least until the European Stability Mechanism (ESM) is in place in the middle of this year. But the ECB appears cool to the idea of increasing its bond-buying program, with recent comments from Council member Nowotny that the ECB is seeking alternative options. In sum, we appear to be in something of a vacuum, in which the natural partner for carrying the load (the ECB) is unwilling and the alternatives (Italy and the EU) are unable. We remain in precarious times, despite the fact that peripheral bond yields are off the highs experienced towards the end of last year.
Welcome fall in UK inflation. The fall in the December inflation numbers from 4.8% to 4.2% was in line with expectations and will be followed by a further sharp decline in the January numbers when the impact of the VAT rise from 17.5% to 20% falls out of the equation. In yesterday’s numbers, it was transport costs together with housing and household services where the main disinflationary pressure was coming from. There was decent anecdotal evidence of early discounting in the run-up to Christmas and this was also clear from the numbers, with clothing and footwear supporting the premise. The other piece of good news recently has been the announcement of cuts in the utilities sector, with electricity prices falling on the back of recent wholesale market developments. This should provide further pressure on the downward forces on inflation during the current year, which may well see the headline rate return to the 2% target in the third quarter of this year. The Bank of England and households should see real incomes falling for another year, and not before time.
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