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Friday March 26, 2010 - 17:43:52 GMT
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20:00 GMT- Mar 26 (global-view.com) Finally, Europe has come to an agreement to defuse the Greek debt situation. Some aspects of the bailout program are vague, but it appears that the IMF together with Germany and France are going to backstop the Greek government. Presumably loans will be coming from the IMF who is charged with dong the dirty work. Chancellor Merkel played her cards well. German exporters have gotten a weaker EUR, and the IMF will be doing most of the work. One key aspect of the job of the IMF will be to get a true accounting of where Greece stands. That would have been a distasteful prospect for Germany under the circumstances.
ECB President Trichet initially lashed out against the Greek agreement, but then reversed direction saying his comments had been mistranslated. What a joke! His initial comments came because the authority, independence and prestige of the ECB had been undercut by bringing the IMF into the mix. The European monetary system has been reduced to a fixed rate currency regime.
The apparent accord on Greece should not be taken as a positive for the EUR. There are still a number of economies facing budget issues and economic growth remains subdued. We see the EURUSD pair heading into the mid- 1.20's by the mid-year period. Importantly EUR weakness is likely to be welcomed by ECB authorities.
The future path of the JPY over the course of the year appears pretty clear, The new Japanese government has been putting relentless political pressure on the Bank of Japan (BOJ) to combat deflation. The yr/yr February nationwide CPI that was released on Friday fell 1.1% while the core CPI measure for that period was down 1.2%. The data prompted the government to prod the central bank to do more to spur economic growth.
One strategy for stimulating growth and encouraging price increases is a weaker currency policy. There was word this week that the Japanese Postal Authority, which is also a massive savings bank, was rumored to have been moving some of its large JPY portfolio into foreign currencies to improve their interest rate yields. there is little doubt that this activity was done following directions from the government, as it tends to weaken the JPY. Recall also that the fiscal year end for corporations ends next Wednesday (March 31). In most years corporations have significant profits to repatriate, but by now the bulk of these transfers must be completed by now. The timing is difficult, but we see the USDJPY trading to back above the 100 line by mid-year.
A key question for anyone in the markets now is where the risk trades are headed. In this group we include: commodity currencies, oil, gold and equities. We view the bond markets as a counter to the risk trades. This is because risk investments must somehow be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades falls. When money is cheap risk trades should become more attractive as a class. Thus the latest week saw the U.S. bond market auctions bend under the weight of massive future structural deficits put in place by the current government in Washington. On the other hand, the economies of some of the commodity currencies (AUD, CAD and NZD) continue to outperform, so those currencies should continue to do well.
See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.
John M. Bland is an author, and co-founder and partner of Global-View.com in 1996. Before that, he was a Vice-President and senior dealer in the fx inter-bank and futures trading arm of the Continental Grain Company in NYC. Previous to that, he was an early member of the Chemical Bank (NYC) corporate advisory service. He also worked in international liability management. John has an MBA from the Hass School at the University of California at Berkeley and a bachelors degree in International Economics from Berkeley.
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