Quotable “Until some domestic demand dynamics start to materialise, the European economy remains in what could be called the no man's land of the business cycle.”
Elga Bartsch & Daniele Antonucci
FX Trading – Stark Raving ... Again.
You’re only as good as your worst player ...
Or something like that. This is why the euro has been so bogged down by daily news citing Greek [debt] tradegy. Just how badly the rest of the Eurozone is set to perform remains a question.
The final arbiter in recent trading has been interest rate expectations. For Europe, the expected rate advantage has deteriorated. Morgan Stanley now expects rate won’t change course from current accommodative levels until well into the second half of 2010.
Developments with Greece and similar occurrences in other member countries will impact expectations, obviously. Today came comments from two big names in Europe.
First, Greece’s Finance Minister George Papaconstantinou:
“We don’t expect to be bailed out by anybody as, I think, is perfectly clear we’re doing what needs to be done to bring the deficit down and control the public debt.”
And it’s a good thing, because earlier ECB member Jeurgen Stark chimed in with:
“The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece.”
And to add some additional third party commentary (and save me some time!), here’s an opinion from an economist at RBS:
“I'm very confident that were help to be needed, it would be there because there's so much at stake for the euro area ...
“The trigger point is if you see contagion in the periphery countries that could affect the core countries...If there was a contagion crisis that threatened the euro zone or the periphery, then the ECB would have the right to intervene.”
Naturally, hence the reason the markets aren’t writing off Greece.
So, the euro has this to deal with. And it alone has a lot of influence on how the US dollar behaves overall. Which says a lot about how the dollar has behaved over recent weeks – it comes back to the growth differential/yield differential thing.
The buck has actually performed relatively well in the wake of positive US economic news. In other words, it’s become somewhat positively correlated with US fundamentals – something we’ve not seen for a long time.
On the agenda for the rest of this week is a threesome of US employment numbers – ADP Payroll Report today, Jobless Claims tomorrow and December Nonfarm Payrolls on Friday.
Last month the Nonfarm Payrolls shocked markets with far better than expected numbers; turned out positive for the US dollar. This month expectations are for an optimistic change (a small drop in payrolls during December.)
This series of data points could prove to have a lasting effect on EURUSD in the coming month ... or longer.
Besides the troubles with European banks and potential similarities to or contagion from Greece’s fiscal fiasco, employment could prove to be a inconvenience to European markets. As Elga Bartsch and Daniele Antonucci at Morgan Stanley so succinctly put it:
“True, in terms of their debt load, balance sheets and savings rate, European consumers are in better shape than their US and UK counterparts. But the lower number of layoffs recorded in Europe since the start of the recession suggests that part of the labour market adjustment is still to come - after all, activity shrank more sharply on this side of the Atlantic. Thus far, tighter employment legislation, voluntary labour hoarding and government-sponsored short-shift programmes have prevented an adjustment in labour costs. We see payrolls being trimmed further and expect the EMU unemployment rate to rise well into 2H10.”
Is this bit of news already baked into the cake? Maybe, or maybe not, or maybe not all of it ... if the US employment picture shows sustained improvement.