EURO TURNS INTO A BAD CIRCUS ACT

By Andrew Wilkinson at IB:

The euro’s performance continues to disappoint, only now turning from a circus act into that of a clown without his make-up. The single European currency now rests below its weakest point reached ahead of the weekend loan package. That near trillion dollar lending program has also cheapened to around $930 billion and according to some market pessimists will fall to an equivalent $750 billion before the year is out should the euro slumps to parity with the dollar.

Euro – Before the birth of monetary union in 1999 some pessimistic forecasts predicted it would not last without fiscal union while one renowned economist told us to see how the euro fared through its first crisis. Well here we are and the chorus of pessimism is getting louder. One media story this morning reports a French threat to pull out of the union should Germany fail to fully back Greece last weekend. In a speech earlier, the grand father of economic austerity and former Fed Chairman Paul Volcker raised his concerns that the euro couldn’t last.

I used to believe that the ripples emanating from Athens would bear few consequences as far away as Beijing, but it would appear that Chinese Premier Wen Jiabao disagrees. Today he poked at the foundation of global recovery and expressed concern over how solid it really was, while sounding concerned that the sovereign debt crisis was deepening.

CEO Josef Ackermann at one of Europe’s largest lenders, Deutsche Bank predicted today that Greece is going to have a hard time repaying what it’s borrowed in full. It simply won’t be able to row enough in order to generate the revenues under the austerity package to pay down what it has borrowed.

The euro clown is fast becoming the only act at the main event and one that’s becoming more painful to watch as his act becomes more compelling. And onlookers are less and less enthralled by the sideshow of slower growth – the result of spending cuts and lower tax revenues. The single currency dropped to a new low this morning at $1.2395 and has since rebounded to $1.2492.

British pound – The pound is weaker and is hampered by the force of the euro’s decline. It would be easy to blame the political situation and claim that investors are nervous over the new coalition’s ability to agree on spending cuts. But the fact is that investors are focused on slowing growth in Europe and to that extent the impact on growth in Britain as a result. The pound is losing out by proxy rather than by a worsening of national fundamentals at this point and cheapened to $1.4496 earlier.

U.S. Dollar – The dollar is stronger across the board with the exception of the Japanese yen, which is also being fuelled by fears again today as perceived risk rises. Interestingly the dollar strengthened to match last week’s manic low against the pound and of course exceeded that courtesy of excessive euro weakness this morning. It also exceeded a similar peak reached in the mania last week against the Swiss franc, while it’s flexing its muscles against the growth-sensitive commodity related dollars.

The dollar is once again sporting its safe haven hat and is benefitting as global equity prices recoil from earlier in the week gains. The global growth outlook took a knock as evidenced by a fourth daily decline for the price of crude oil, while industrial metals prices were sunk by fears that the world will slow. U.S. data continues to sit in the backseat in such an environment and even though most would admit that interest rate increases are off the agenda in the United States for now at least, the firming economic data serves to detract from the euro and maintain the argument for holding dollars on a growth-related perspective.

Data on the calendar should show a seventh-straight increase in retail sales, while consumer confidence should continue to improve. Meanwhile as employment gains appear to be sticking, businesses will likely bolster inventories according to data due later this morning.

Aussie dollar – The Aussie dollar continues to find its path tripped up by the euro clown. Today it ground lower to 89.15 U.S. cents as the threat emanating from the Eurozone continues to create doubts over global growth prospects.

Canadian dollar – The Canadian dollar suffers the same fate and lost ground to the greenback as it slips to 97.40 U.S. cents.

Japanese yen – The yen rose against the dollar, which buys ¥92.53 while against the British pound the yen continued to rise. One pound today buys ¥134.97 while one Australian dollar buys less yen today at ¥82.44.

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