Euro soars on hopes of new Greek bailout and disappointing US numbers
06/Jun/2011 • Currency Updates•
Financial markets in general – and currency markets particularly – continue to be driven by headline news on two fronts. On the one hand, there is the resolution (or lack thereof) of the peripheral funding crisis in Europe, as it becomes clear that the first Greek bailout has failed and a second one is necessary to prevent a sovereign default. On the other there is the unfolding economic slowdown worldwide – and in particular in the US – where further signs are emerging that the already less-than-stellar economic recovery is slowing further. In Europe, reports late last week suggested that a new bailout package is taking shape, conditional on even harsher austerity measures from the Greek government and an accelerated privatization schedule. While markets and observers generally agree that a Greek default is inevitable, traders reacted positively to the news that this outcome will probably be delayed for a few months. The combination of this news with another round of disappointing macroeconomic data from the US stalled the nascent dollar rally and sent the euro soaring, while equity and commodity markets sold off sharply and government bonds rose to new highs for the year.
More gloomy news on the state of the UK economy emerged last week. The main bright spot in an otherwise dismal picture had been, until now, that business sentiment indices had held relatively well even as domestic demand waned. Last week, both the services and manufacturing PMI fell – the latter very sharply. Observers were busy delaying their calls for the first Bank of England hikes till later this year, or even into 2012. The latest data will certainly do nothing to change the balance of votes away from the dovish camp. The FX markets finally paid heed to these disappointments, and sterling endured a terrible trading week, dropping 0.6% against the dollar and a whopping 2.7% against the euro.
All eyes were fixed on the Greek drama last week. As reports emerged that a fresh bailout had been agreed upon, with the Greek Government committing to even harsher cuts and faster privatization schedule, the euro soared against most other currencies. Neither the market nor observers expect the bailout to do much beyond delaying the inevitable default, but euro officials seem to be mostly interested in gaining some time. Meanwhile, neither the Greek problems, nor weakening PMI numbers, particularly in the battered periphery, nor the correction in commodity prices seems to be dissuading ECB officials from hiking rates further, and comments last week were uniformly hawkish. Markets expect another rate increase in July and the widening rate differential, together with the welcome prospect of no further Greek headlines for at least a few weeks buoyed the euro, which ended the week above the 1.46 level against the dollar.
A dismal week in the macroeconomic front in the United States. The sharp slowdown in payroll growth (to 54,000) in the jobs report Friday capped a week that saw the manufacturing PMI drop to 53.5, from the above 60 readings it held during most of 2011, and the services PMI confirm April’s sharp drop (even though it rose 1.8 points from April’s low level). Consumer spending, hiring, investment and government spending all seem pulling back simultaneously, raising questions about the speed of the economic recovery and the length of time it will take before employment slack is absorbed. Consequently, expectations for monetary policy normalization were pushed further into 2012, Government bond yields dropped to year lows, and the nascent dollar recovery of the last few weeks reversed for the time being, as the trade-weighted dollar dropped 0.6% for the week.