FX: Mixed US Data, Merkel Wants Greece in Euro Warts and All

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The U.S. dollar is trading slightly higher against all of the major currencies with the exception of the AUD, which benefitted from a slight improvement in business confidence. There is still a general sense of caution in the market that explains the demand for dollars and pressure on high beta currencies. With unresolved problems in Spain and Greece still posing a threat to stability in the financial markets, there has been very little fundamental support for optimism. Today’s confusion around the 10-year Spanish benchmark was an example of how easily investors can be spooked by unexpected announcements from Europe. The EUR/USD dropped nearly 100 pips at the start of the London trading session when Bloomberg Terminals showed an incorrect Bund/Bono spread. This was quickly corrected but left a lasting impression on the EUR/USD, which failed to recapture its losses.

It is Day 2 of the Ecofin meeting and the Finance Ministers decided to give Portugal an additional year to meet its budget goals and release their next aid payment. According to EU Economic and Monetary Affairs Commissioner Olli Rehn, Greece could also be given a 2-year extension. German Chancellor Angela Merkel is in Athens today and as we expected, she wants Greece to remain in the euro. Merkel indicated that the 2 “partners and friends” are working hard to solve problems together and said Germany will do everything in their power to help Greece gain access to the European Investment Bank. Between her physical presence in Greece and comments, Merkel made it clear that she wants Greece in the euro, warts and all. ECB President Draghi also delivered a speech this morning where he admitted that the euro area economy probably weakened in the third quarter. He indicated that the central bank is discussing releasing minutes but no decisions will be made at this time.

The only pieces of U.S. economic data released this this morning were the NFIB Small Business and the IBD/TIPP Economic Optimisms indexes. Businesses grew less optimistic last month while consumers grew more optimistic in October, which is consistent with the improvement in non-farm payrolls. Yet these third tier economic reports did not leave a mark on the U.S. dollar because they do not have much impact on Fed policy. Instead, investors are focused on third quarter earnings, which kick off unofficially with reports from Alcoa, YUM and Chevron after the bell. A number of bellwether companies warned that earnings could miss analyst estimates, pushing the bar to very low levels. The IMF’s downgraded growth expectations also didn’t help because now we have central banks, major corporations, the IMF and global investors worried about economic activity in the months ahead. This means monetary policy needs to remain easy and perhaps become even more accommodative in certain parts of the world.

Kathy Lien
Managing Director

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