Ireland Says It Won't Need Additional Bailouts
The currency markets were pretty exciting yesterday with the dollar losing steam early on but slowly building some momentum on the upside throughout the day. This morning, the dollar has spiked higher as investors start to seek out the “haven” of U.S. Treasuries.
The currency markets continue to be held hostage by the Greeks. As I mentioned in the closing lines of yesterday’s Pfennig, the leaders of Greece’s coalition government reached an agreement on implementing the austerity measures demanded by the EU and the IMF in order to secure a second round of much-needed financing. As predicted, this news caused a rally in the euro (EUR), which reached a high of 1.3320. But eurozone finance ministers said they want to see the measures approved by the full Greek parliament, which is set to vote Sunday. While Greek leaders certainly feel the measures will be passed by the parliament, workers staged a strike in Athens today in order to protest these measures. The EU leaders gave the Greek leaders 15 days to institute the new austerity measures, so they could possibly delay the vote further if they see it has a risk of not passing. But I’m sure they would much rather get this over and done.
The debt holders who have reached preliminary agreements for a debt swap which would cut Greek’s debt load in half are also waiting for the results. The bonds held by the ECB are not subject to this debt agreement, but many of the Greek leaders are assuming the ECB will go ahead and agree to take a haircut on these holdings in line with what the other debt holders have agreed to. The ECB is reluctant to enter into a debt swap agreement as it could open the door to requests from Portugal, Ireland or even Spain and Italy for additional debt concessions.
Irish Prime Minister Enda Kenny made me proud to be 50% Irish when he said his government is not going to be looking for any further debt concessions from the ECB. “It’s very clear that Ireland has not sought and will not seek any write-down,” Kenny said in an interview on Bloomberg yesterday. “We’ll pay our dues in full and on time.” This may look like Irish pride, but it is, in fact, a smart move by Kenny, who will need to refinance about 30 billion euros of debt. By letting bond buyers know they will not be seeking any debt concessions, Kenny is trying to make sure he will be able to refinance the debt at more favorable terms and over a longer period of time. We haven’t heard much from Ireland lately as they go about their business trying to get their economy back on solid ground. But the attitude of their PM certainly leads you to believe they are moving in the right direction and won’t be looking for any additional handouts.
I had a couple of Pfennig readers ask me to not spend so much time on the euro debt situation, and to let them know what was going on with some of the other currencies. I will certainly try to touch on a number of different currencies today, but as I said at the opening, the currency markets are really being held hostage by the events in Greece right now. This is the big news and the euro will continue to move the markets one way or the other, dragging along all of the other currencies behind it. So I’ve got to touch on the euro first, but then I promise to move to some other currencies.
The ECB meeting was a nonevent, with rates remaining where they are and no new announcement of bond purchases. Data released in Germany showed the inflation rate remain unchanged at 2.3% during the month of January, which was in line with forecasts. The ECB has pumped a lot of liquidity into the markets, so they had to be relieved when inflation remained subdued.
ECB President Mario Draghi signaled the economic outlook has improved, as the economic stimulus pumped into the markets back in December seems to have stabilized the credit markets. European banks borrowed nearly 500 billion euros in December, and the ECB will offer another round of lending at the end of this month. It will be interesting to see what the demand is, but I would expect the banks will again eagerly accept the cheap funding from the ECB.
Draghi would not discuss the ECB’s Greek debt and if the central bank would accept losses on these holdings in order to cut Greece’s debt load. “All this talk about the ECB sharing the losses, it’s ungrounded, it’s unfounded.”
The Bank of England is opening up the spigots again on bond purchases, raising their target for bond purchases by 50 billion pounds (GBP), to 325 billion. This equals more than a quarter of current outstanding bonds, and is something investors in the pound should be worried about. Here is why. Bond purchases by the central bank are basically “monetizing the debt” and are the most-inflationary measure a central bank can take. The bank issues bonds, sells them to the markets and buys them back — really no different from throwing buckets of cash from helicopters. Again, this is the most-inflationary measure a central bank can undertake and will likely lead to an eventual devaluation of the pound sterling. But this is sometime down the road, and the BOE obviously feels the present need for more stimulus outweighs the inevitable problems this will bring in the future.
Staying with the European theme, I will move to Hungary, where the forint dropped for a third day and is headed for a weekly loss. Hungary is the EU’s most indebted eastern member and would like to grab the attention of the IMF for some help of its own. But the EU and IMF have been focused on Greece, so Hungary has been left to its own devices. The forint has actually been performing pretty well since the beginning of the year, appreciating 9.1% versus the U.S. dollar.
Another of the former Eastern Bloc currencies that has been performing well this year is the Polish zloty, which is up over 7.7% versus the U.S. dollar this year. And according to a fund manager at the Franklin Templeton Group, Poland’s zloty is still “undervalued.” “Poland demonstrated its economic robustness by being one of only a handful of countries globally to not fall into recession during the global financial crisis,” the Templeton manager wrote in a note to clients. And he is putting his clients’ money where his mouth is, as the Templeton Global Bond Fund is the largest foreign holder of Polish debt.
Moving away from the European continent, the commodity currencies performed well through most of the trading day on Thursday, but are off of their highs this morning. Both the Australian (AUD) and New Zealand dollars (NZD) reached multimonth highs yesterday after the news that Greek leaders had reached an agreement on austerity measures. But the currencies turned sharply as the day progressed and the EU pushed for further confirmation from Greece.
The Australian dollar was negatively impacted by the Reserve Bank’s lowering of its forecasts for growth and inflation during 2012. The RBA said it sees the economy expanding at 3.5% in 2012, down from its earlier estimate of 4%. And “inflation is forecast to remain around the midpoint of the target range for most of the next couple of years,” the central bank said today. Consumer prices are predicted to rise 3% during 2012, less than a previous prediction of 3.25%. The lower growth and inflation estimates would seem to ensure the RBA will remain on an easing bias even after it surprised some in the markets by not moving rates lower at their last meeting.
The South African rand (ZAR) has been the worst-performing currency, dropping 2.33% yesterday and over 3% versus the U.S. dollar over the past week. Commodity prices retreated yesterday after the EU pushed Greek officials on the bailout agreements. There is a general “risk off” mood in the markets this morning, and investors are moving away from the rand and higher-risk currencies into the haven of U.S. Treasuries. We will probably see more of this today, with investors not wanting to take risks with the Greek vote scheduled on Sunday.
Data showed Brazil’s consumer prices are still rising, increasing 0.56% MOM in January. The annual rate of change slowed slightly to 6.22%; a number that is still much higher than what the government would like. Central Bank President Alexandre Tombini said last week that policymakers would work to bring inflation back down to 4.5%. The government has backed itself in a corner with their attempts to control the value of the real (BRL) at the same time they are trying to keep inflation in check. By pushing their currency lower, they have triggered inflation, as commodity prices have remained on an upward track. The government will quickly have to decide which one is more important, a cheap currency or lower inflation. One way to bring down inflation would be to allow their currency to appreciate, in the mode of the Singapore monetary policies.
Indian factory output was less than estimated in December, signaling weaker domestic demand as the global recovery faltered. Output at factories climbed 1.8% from a year earlier, after a 5.9% advance in November. Economists had predicted a 2.6% gain, so the number was a fairly large surprise to the markets. Both India and China have attempted to temper growth, and the tap on the brakes has seemed to work as planned, with growth slowing in both of these emerging markets.
The Chinese renminbi (CNY) increased to an 18-year high yesterday, just ahead of a visit to the U.S. by Chinese Vice President Xi Jinping next week. The unexpected acceleration in Chinese inflation has pushed Chinese leaders to allow faster currency appreciation. As I mentioned above, Chinese growth has slowed, and exports are predicted to have fallen in January, according to the Chinese commerce minister.
Moving back to the U.S., the initial jobless claims posted a 358,000 number, which was less than the expected 370,000 increase. Continuing claims were slightly higher at 3.515 million. Another piece of data showed consumer confidence rose to the highest level in a year. Today, we will see the trade balance (or, more appropriately, the trade deficit), which is predicted to have widened in December to a six-month high.
Both gold and silver prices are down this morning as investors again move into the U.S. dollar and away from what I consider the true “safe havens.” I will dig into the metals a bit more on Monday, as I am quickly running out of time this morning.
To recap, the euro rallied yesterday, but then turned sharply as the EU/IMF demands a positive vote by the Greek parliament, which is scheduled for this weekend. The ECB left rates unchanged and did not announce anything new regarding the Greek debt. The BOE announced an increase of 50 billion pounds to their QE bond-buying program. Commodity currencies were sold off as “risk” became a bad word again. And the Chinese renminbi was pegged at an all-time high overnight.