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  • US labour market still not improving fast enough
  • More stunning German trade numbers
  • Aussie recovers some lost ground
  • Here we go again

It’s sometimes a struggle to decide what to buy for birthdays but, for the EU/IMF rescue package for Greece (IMF approval granted a year ago today), another face-lift is on the cards. EU officials have at last come round to the view that there is virtually zero prospect of Greece being able to stand on its own two feet early next year (as currently planned) and raise funds from the open market once again. You only have to take one look at the yield curve (where 2-yr rates are trading at 25%, 5-yr at 17%) to reach the same conclusion. The talk follows a meeting on Friday, where select EU finance ministers met, which was initially reported by Germany magazine Der Spiegel as a discussion of a Greek exit from the euro. These rumours hit the euro into the end of the week, pushing EUR/USD below the 1.44 level. So far though, there have been no indications that any sort of debt restructuring is under consideration. However without this it remains difficult to see how another nip to the current facilities is going to put Greece onto the path of fiscal sustainability.

Guest post by FXPro


US labour market still not improving fast enough. The rise in the unemployment rate came about on a virtually unchanged labour force, so was almost exclusively owing to a rise in the unemployed, as determined by the household survey rather than a fall in the labour force which impacts the rate just as much. This is the first increase in four months, following on from the fall from 9.8% in November of last year. The issue has been that much of this change in the rate came from an increase in the labour force, rather than a sustained improvement in the employment position. Given the pace of current job gains, we are still looking at four to five years until total employment (on establishment measure) reaches the pre-recession peak. However we are looking at even longer for the unemployment rate to improve to a similar level, on the basis of a growing population and also some stabilisation in the participation rate. Overall the pace of job-market improvement remains too slow for the Fed, the White House and for the household sector as a whole.

More stunning German trade numbers. The March trade numbers smashed through expectations this morning, the trade balance coming in at EUR 18.9bln, from 12.1bln in February. The 7.3% gain in exports was the strongest for a year and whilst these numbers can be volatile month to month, we have seen a short-term improvement in export growth over the past few months.

Aussie recovers some lost ground. With commodity prices sinking rapidly last week, and some suggestion that the pace of recovery down under is tapering off, it has been a very challenging time for the numerous Aussie bulls. After reaching a new post-float high above 1.10 on Monday, the AUD dropped to 1.0537 late last Thursday. However, the RBA has provided some solace for the bulls, announcing in its quarterly review that tighter monetary policy would be required at some point in order to contain inflationary pressures. The Australian central bank raised both the level and the profile of its inflation forecasts in this report, which may indicate that more than one rate hike is required. It is worth recalling that interest rates have been raised on seven separate occasions between October 2009 and late last year. In response, the Aussie showed great resilience to the risk-rout going on elsewhere.

The key upcoming domestic event is the Federal Budget on Tuesday. The expectation is that Treasurer Swan will announce spending cuts in order to return the budget to surplus as quickly as possible. With the RBA also signalling future tightening, and the strong currency representing a huge headwind for exporters, the Australian economy could well be in for a tougher time in the second half of this year. Against this backdrop, it would not be surprising to see those traders with Aussie long positions considering taking more money off the table.

Here we go again. Some of the parallels with 2010 are also uncanny. The year started with a sense of optimism and the main debate was the extent to which the Fed would unwind its ultra-accommodative policy by year end. The reality proved to be somewhat different. This year, expectations of policy tightening in the UK and eurozone, combined with the end of QE2 and renewed talk of an exit strategy from the Fed, were the dominant themes of Q1 and are now petering out rapidly in Q2. For developed economies, the hope has been based on the premise that, with the worst now over, the good times should be around the corner. In reality, as we wrote early last week (, the healing process can be counted more in years than months. Markets sometimes forget this, but towards the end of last week the fog of euphoria lifted.