Euro rally peters out on Friday on fresh doubts about Greece

Tom Tong13/Φεβ/2012Currency Updates

The recent rally in the common currency came to a sudden end on Friday. News that Eurozone finance ministers had rejected as insufficient the latest Greek plan for futher cuts jolted the common currency, and reports of unrest and growing popular opposition to yet another ratcheting up of the austerity vice sent it tumbling for the rest of the day. Up until then, it had been a relatively upbeat week for risk assets worldwide, with steady but unspectacular gains in most equity indices. These gains were given up on Friday’s flight to safety, and worlwide stock indices ended the week roughly flat. The main macroeconomic trend we have been pointing to continued. The US economy is finally developing some cyclical lift, Europe as a whole is stagnant or worse, and the european periphery is experiencing a pronounced double dip after failing to recover in any significant way from the Great Recession of 2009.


The main news was of course the Bank of England February meeting. A we (and the consensus) expected, the MPC agreed to extend Quantitative Easing by purchasing another 50 billion pounds worth of Gilts. Economic data were mixed, with positive news in the December manufacturing report more or less balnced out by negative news in the construction report for the same month. The dilemma between relatively positive PMI sentiment indices and poorer (and less timely) production data has not been resolved. We maintain our forecast for near zero growth in the first quarter, and expect Sterling to fall against the dollar but rise against the Euro.


Trading in the common currency was dominated towards the end of the week by headlines on the latest Greek austerity package. While it seems likely that some sort of agreement will be reached, we think that the real news is the macroeconomic disaster unfolding in the periphery. The Greek example is sobering: unemployment rose 3% in just one month, and December industrial production dropped 11% from the extremely depressed levels of a year ago. Mr. Draghi confirmed in the ECB press conference that the last quarter of 2011 had been «very weak». This occurred not only in the periphery, but also in Germany, where we expect a drop of nearly 1% SAAR. The latest retail sales and industrial production in Germany (December) were also very negative surprises. We continue to believe that only external demand can lift the Eurozone out of its second recession in less than three years, and maintain our bearish forecast of the common currency over the medium term.


A very quiet week in the United States. Macroeconomic news were sparse and mixed. Weekly jobless claims fell again, keeping up the good tone of labour market reports out of the United States. However, the December trade report was disappointing. The trade balance deteriorated into the end of 2011, which means that housing and consumption will once again have to provide the impetus for the US economnic recovery. We believe they will not disappoint, and therefore we maintain our positive view of the dollar.


Written by Tom Tong

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