BBH CurrencyView: Greece Returns With Vengeance

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Highlights

The US dollar is enjoying broad gains today as the Greece’s fiscal woes have returned with vengeance.  Market News International reports, that have been given some idea of what an IMF program could entail, are now looking for support.  The sharp backing up in Greek yields plays on market fears over the country’s ability to secure financing ahead of large coupon payments and maturities this month and next.  This is not only helping the dollar, but is also seeing the yen recover as well.    The 25 bp rate increase by the Reserve Bank of Australia as helped allow the Aussie to remain resilient in the face of the stronger greenback. 

With many investors returning from a long holiday weekend, the global equity markets are playing catch-up by posting modest gains.  The MSCI Asia-Pacific Index rose 0.4%, helped by recent rise in commodity prices.  Japan’s Nikkei slipped 0.5%, dragged down by profit-taking among shippers (after posting 8.5% gain last week).  Autos and electronics were also softer.  The biggest advance was the 2.1% in the Philippines, to lift the main index to its best level in 2 years.  Lower bills yields and stronger than expected tax revenues helped provide the fuel.   European bourses are 0.5%-0.8% higher, led by oil and basic materials.  Health care and telecom are laggards.   US shares are trading a touch lower in Europe and the early call is for about a 0.25% lower opening. 

The bond markets are also playing catch-up.  Tepid reception to Japan’s 10-year auction weighed on JGB prices, with the 10-year yield rising 2 bp.  European bond yields are mostly 3-5 bp higher.  Greek bond yields have risen sharply. The 2-year yield is up 30 bp to 5.34% and the 10-year yield is 24 bp higher at 6.76.  The premium over Germany is near 362 bp, up from around 300 after the EU/IMF support agreement.  Ironically, this may be helping US Treasuries stabilize by providing a safe haven bid.   The US sells $40 bln 3-year notes today.

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Greece, which accounts for around 2.5% of the euro zone’s GDP is again a main driver in the global capital markets.  Press reports suggest that despite the previous threat of going to the IMF if Europe did not step up to the plate, Greek officials are having second thoughts.  The implication is that Greece has a better sense of the conditionality that would be attached to receiving its funds.  At the same time, while Greece has indicated that this month’s financing needs have been pre-funded, there continues to be concern the April-May maturities and coupon payments.  Meanwhile, Greece officials, quoted on other news wires are clarifying their position.  They now appear to be seeking more details rather than to renegotiate the agreement.   Reports suggest Germany is seeking to adhere to the “no concession or subsidy” line and insisting that Greece pays market rates (6.0%-6.5%) for assistance.  Other euro zone members seek to be more willing for something closer to 4.5% (which is around what Ireland pays).   Borrowing from the IMF might be around 1.25%, but with apparently more onerous conditions, which the Greek government suspect would cost it support and additional social instability.

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As widely anticipated, UK Prime Minister Brown has called for a May 6th election.  The Bank of England has pushed its May 6th meeting to May 10th and the Debt Management Office has pushed the May 5th auction (2,013 gilts) to April 28th.  There are 4 weeks and 2 days until the election.  Polls over the weekend had shown the Tory lead had widened to 10-11 percentage points, but the ICM poll released yesterday showed the Conservatives with only a 4 point lead.  That was believed to have pointed to a Labour victory, but 10 seats shy of a majority.  The risk of a hung parliament may continue to weigh on sterling.  Immediate support is seen in the $1.5100-20 area and then $1.5050.  Corrective upticks should encounter resistance in the $1.5200-$1.5250 band.  The euro found support just ahead of GBP0.8800, but the rally to GBP0.8860 may be the bulk of the advance.  The anxiety over the election may have discouraged the market form responding to a larger than expected rise in the UK’s construction PMI.  It rose to 53.1, a 2-year higher, from 48.5 in February.

In a closer call, the Reserve Bank of Australia did deliver a 25 bp rate hike to bring the cash rate to 4.25%.  It is the fifth hike since last October and the RBA clearly kept the door open to additional rate hikes.  Most market participants are looking for another 50-75 bp in rate hikes this year.  The fact that the recent retail sales report and building approval data were disappointing had discouraged some form expecting the RBA to pull the trigger.  Officials are arguably keeping their focus on the bigger picture with is that economic conditions are sufficiently strong as to make more historically average interest rates to be more appropriate.  The RBA is also concerned about potential excesses in the housing market.  High and higher interest rates, coupled with favorable terms of trade (higher commodity prices) and strengthening Chinese economy (recent PMI) helps underpin the Australian dollar. The next target is $0.9300-30.

It is widely recognized that the Swiss National Bank intervened last week on the euro-franc cross.  Since the intervention on 1 April, the cross has been confined to a clear range of CHF1.4300 to CHF1.4350. If the goal of SNB officials was to stop the one-way market that saw the euro fall more than 4.5% against the Swiss franc in Q1 10, it succeeded.  If the goal was to reverse it, gratification may be more elusive. Today’s March CPI report may suggest that the more limited objective is the more likely case.  Although March CPI rose only 0.1% on the month, because of the base effect, the year-over-year rate rose to 1.4% from 0.9% in Feb.  This is a 16 month high.  Core inflation rose 0.5% year-over-year, turning positive after Feb’s – 0.1% reading.

The dollar is trying to establish a foothold above CHF1.0680.  If successful, the dollar can rise toward CHF1.0750 in short order.  For its part, the euro is testing the $1.3400 area, but support is seen near $1.3385.  If this goes, the market may quickly target the $1.3270 area.  Sentiment toward the euro remains poor and combination of the backing up of US interest rates in the context of stronger than expected US economic data underscores the relative attractiveness of the dollar.

  
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The economic calendar is light in North America today, largely limited to the minutes from last month’s FOMC meeting.  The reception to the 3-year note auction may also be a market factor in the North American afternoon.  While yesterday’s re-opened 10-year TIP sale was well received (highest bid-cover in nearly 13-years) and the 3 month bill was in even greater demand, there is concern about the conventional coupons after the soft reception at the auctions in late March.

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Marc Chandler is the global head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the BBH FX website here.

This material has been prepared by Brown Brothers Harriman & Co. (“BBH”) and is intended for information purposes only.  This communication should not be relied upon as financial, investment, tax or legal advice.  This communication should not be construed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.  This information may not be suitable for all investors depending on their financial sophistication and investment objectives.  The services of an appropriate professional should be sought in connection with such matters.  The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed. Sources used are available upon request. Any opinions expressed are subject to change without notice. Please contact your BBH representative for additional information. BBH’s partners and employees may own currencies in the subject of this communication and/or may make purchases or sales while this communication is in circulation.

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