Despite warm words and hand-shakes between Merkel and Samaras, the euro was clearly not convinced that all is rosy between Greece and Europe. Indeed, the single currency has looked quite wobbly during the first half of this week, falling overnight to a low of 1.2835, now 1.2860.
The sellers have been in control, triggering stops on the way down. Also, there has been some aggressive closing-out of long EUR/AUD positions – after reaching 1.2825 on Monday, this cross is back under 1.26. As a result, the Aussie has held firm, currently 1.0220. Looking ahead, critical support lies just below at 1.2823 (the 200d moving average); some decent buying emerged overnight below 1.2840.
Meanwhile, both the dollar and the Japanese yen have a healthy glow, aided by the defensive disposition evident in asset markets. Looking ahead, the IMF and World Bank are meeting in Tokyo, ahead of the G7 meeting this weekend.
Commentary
Tokyo’s increasing yen agitation. Yesterday’s hawkish rhetoric from Japan’s Vice Finance Minister Nakao suggests that Tokyo is becoming increasingly agitated with the strength of the currency. With this weekend’s G7 meeting in Tokyo looming large on the horizon, Nakao once again threatened that Japan was ready to take decisive action. More interesting was his suggestion that Japan would look to gain the G7’s imprimatur for intervention and that the purchase of ESM bonds is under consideration. The latter is sure to curry favour with Europe, at a time when it has been courting China for a larger bond-buying commitment. America is also likely to consider this proposal – it will need to weigh its opposition to FX intervention against the obvious contribution to European financial stability that Japanese purchases of ESM bonds would make. For those who are long the yen, this shift in Tokyo’s dialogue on intervention is a major short-term risk. Within a couple of weeks, Japan might just unleash its massive FX intervention war-chest to weaken the currency.
The sterling fight-back? In the latest IMF forecasts for the global economy, the biggest cut in growth expectations for the developed markets was reserved for the UK, with its forecast of the economy for this year cut by 0.6%. Even taking into account emerging markets, it was only India and Brazil that saw bigger downgrades for the current year. The real stand-out is on the borrowing side. In relation to the size of the economy, the IMF sees the UK borrowing more than Greece this year, a deficit of 8.2% of GDP compared to 7.5% in Greece, with the same holding true for 2013. This is held up as the main counter-argument to those who see sterling as something of a safe-haven from the storms elsewhere in Europe. But as always it’s not as simple as that. One of the main reasons why the UK can sustain this deficit is the much longer duration of its borrowing; excluding t-bills and including index-linked bonds, the average maturity of UK debt is 19 years. Ahead of 2010, the average maturity of Greek borrowing was 5.6 years, although this is now extended owing to the official loan programmes. Because there is a relatively small proportion of the total debt to be refinanced each year, the market remains comfortable extending a reasonable amount of leeway to the UK and also sterling. So, although there are calls for ‘Plan B’, the government is content to go along with what it is calling ‘Plan A+’, which appears to be continued austerity with some measures thrown in to boost growth. Technically, sterling is looking pretty interesting vs. the EUR. EUR/GBP corrected yesterday after seven consecutive days of gains, with some tough areas of resistance seen from the June closing highs (0.8095) and September highs (0.8112).
The encouraging pace of US deleveraging. On numerous occasions in recent months we have remarked on the creditable progress that America has made in terms of deleveraging its once obese balance sheets. In that regard, it is worth drawing attention to a Bloomberg article on this very subject, which provides some fresh colour on how this deleveraging is proceeding. According to Bloomberg: 1) Total US indebtedness (including government and the private sector) fell to 329% of GDP at the end of Q2, down from 359% four years ago. 2) Private sector borrowing has fallen by USD 4 trln from a peak of USD 40.2trln. Consumer debt fell to USD 11.2trln at the end of Q2, from a peak of USD 12.8trln in 2008. 3) Household wealth in the US rose to USD 62.7trln at the end of June, down from USD 51.2trln three years ago. America is much further down the path of balance sheet-deleveraging than Europe and Asia. Consumer debt obligations as a percentage of disposable income have fallen to a two-decade low. Notwithstanding the understandable concerns regarding the truly frightening scale of future debt obligations faced by the US government, the deleveraging witnessed in the broader US economy over recent years is commendable. Potentially this development augurs well for the dollar over the medium term. .
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