Euro continues to stumble, Aussie playing catchup

Aussie and its ilk are playing catchup to the downside as the deteriorating risk conditions stemming from the Euro Zone’s existential crisis are making waves all across global markets.

If you missed it Friday, please see our big picture look at the G10 currencies, a series of charts showing the relative strength of each of the G10 currencies against an evenly weighted basket of the remainder of its G10 peers.

Dreading the drachma?
The Euro continues to suffer in the wake of Stark’s exit from the ECB, on rumors that Germany is girding itself for a Greek exit from the EU and on ongoing signs that the ECB and EU governments are simply unable to get ahead of the galloping fears of a systemic banking crisis triggered by the lack of trust in sovereign debt. CDS’ on Italian sovereign debt ended last week at a new high for the cycle and Greek 2-year debt trades at a stratospheric yield of 57%, suggesting the investors believe they will receive well under 50 cents on the Euro for their Greek debt in the event of a default. Greece is still making quite a show of trying to meet fiscal targets as Finance Minister Venizelos announced a plan to cut a month’s salary from all publicly elected officials and to impose a new property tax that would be collected via consumers’ electricity bills to secure collection (Greece has an enormous tax dodging problem). The measures are looking increasingly desperate and untenable and we can be sure that there won’t be a third bailout option for Greece – it will either meet the targets or opt to default, with odds rapidly rising of the latter.

European bank equities also continue to crater, led by French banks like SocGen and BNP Paribas. These stocks are the easiest way to track a “live barometer reading” on EU breakup fears in addition to the Euro itself. The technical break of the 1.40 area in EURUSD has also opened up an enormous area that has few support levels for guidance until we get down close to 1.30.

Chart: EURJPY
As bond yields continue to crate, the BoJ has only been barely successful in holding the line on JPY appreciation against the USD, so the yen is rushing higher elsewhere. Against the Euro, the JPY reached its strongest level since well before the actual circulation of the single currency, trading as low as 104.00 before this article’s pixel time. Japanese officials continue to rail against the strong yen and the new FinMin Azumi promised “bold action, especially against speculative trading”. Looking at the JPY charts today, it will take bold action indeed – can Japan succeed in pulling an SNB?



Of course, as the Euro is grabbing all of the headlines for its weak ways, it’s hard for us not to point out that the single currency has rallied, yes, rallied 200 pips versus the Aussie in today’s trading from the lows, as our comment late last week that the Aussies would have some catching up to do on the downside if risk appetite continue to sour proved correct.

Focus this week
The main focus this week will continue to be on the Euro Zone and whether we will continue to see the pressures pushing the Euro into the abyss or whether the ECB and EU can muster a sufficiently robust response to give the market some pause. No signs of the latter just yet, by any means.

In the UK, a government plan to ring fence retail banking operations from investment banking ones is under consideration. Banks are obviously against this due to its high cost, and though the pound continues to thrive as an anti-Euro and a benefactor in the face of risk aversion, it’s popularity may wear off a bit if this package moves toward passage. EURGBP has in fact bounced considerably on the day after the recent steep retreat, with 0.8675 as a key resistance/pivot area.

This week we should look for the first reactions to the new Obama stimulus plan and a taking of the Republican opposition’s temperature that may give an indication on how difficult the birthing process will be for a new stimulus bill. Again, simple game theory dictates that the Republicans will be moved to pass some similar version of this bill, perhaps with a few future spending cut caveats as Obama has crafted a package proposal that could have easily been created by non-Tea party Republicans. The more critical issue

It will be interesting to hear what the Dallas Fed’s Fisher has to say at his speech on monetary policy later today. He is the most vocal of the voting dissenters and may use today’s appearance to speak out against the next steps the Bernanke majority is considering, not that this will necessarily deter them as they meet next week.

On the economic data front, we’ve got inflation data up from the UK tomorrow and from the US on Wednesday (PPI) and Thursday (CPI). US Aug.  Retail Sales data is set for release on Wednesday as well. Among the central banks, the RBNZ is set to meet Thursday, as is the SNB. The first two regional US manufacturing surveys, the Empire and Philly Fed, are set for Thursday, though last time around, these were misleading as a still resilient Chicago PMI was a better indicator of a better than expected ISM manufacturing number in August. Stay tuned.