Risk FX Holds Still As Doubts Dominate

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Market Drivers November 12, 2012
Greece passes austerity budget
Japanese GDP contracts -0.9%
Nikkei -0.93% Europe -0.29%
Oil $85.00/bbl
Gold $1734/oz.

Europe and Asia:
AUD Home Loans 0.9% vs. 1.1%
JPY GDP -0.9% vs. -0.8%
JPY Tertiary Industry Index 0.3% vs. 0.0%

North America:

A very subdued session on the first trading day of the week in the currency market with risk currencies mildly bid but failing to generate much upward momentum despite seemingly positive news over the weekend. In Asia Chinese trade data came in better than expected printing at 32.0B versus 27.1B while in Greece the Samaras government was able to pass the austerity budget paving the way for another tranche of EU aid.

The Chinese trade data saw the surplus widen as exports increased for the second month in a row. China’s October exports rose 11.6% from a year earlier, faster than September’s 9.9% rise and higher than economist expectations for a 10.0% expansion. However exports to Europe fell 8.0% from a year earlier in October while exports to the U.S. increased by 9.1%.

The sharp dichotomy between the European and US demand underscores the reason for currency market’s hesitancy towards risk. As we noted earlier, “One of the more toxic side effects of the two year EZ sovereign debt crisis is the fact that it has put a freeze on general business activity in the region with the result that many investors fear that the recession which has gripped the periphery European economies may now hit the core economies of Germany and France.

If both Germany and France tip into a recession the concomitant decline in region’s demand is sure to impact China’s export sector. Europe is one of the most important exports markets for China and any slowdown in the region is sure to reverberate across in Asia. That’s why despite the seeming evidence of a “soft landing” in China and the weekend’s better than expected Trade Balance data investors are less than optimistic about the growth prospects in 2013.”

With North American markets at half staff due to the Veteran’s Day holiday, trading may remain muted for the rest of the day, with markets looking for any news out of the Eurogroup meeting. Germany however has already stated that it will not favor releasing further bailout funds to Greece before the Troika report comes out next week. Greece is in danger of a technical default by mid-November but EU officials are confident that they can stopgap financing through a T-bill auction.

The much more critical question is how EU will deal with the long term structural problems in Greece which for all intents and purposes is insolvent. EU has a target of reducing Greek debt/GDP ratio to 120% by 2016, but despite attempts at austerity for the past 2 years Greek debt has only climbed higher and may tip to over 200% of GDP if the economy continues to slump. The newest policy proposal is to extend Greek debt maturities, but at this point they would have to be extended by 50-100 years in order to have any realistic chance of payback. That’s why the only real solutions for Greece remain debt forgiveness or currency devaluation via expulsion from EMU and until EZ leaders face those choices the crisis will likely drag on.

Boris Schlossberg
Managing Director

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