DailyFX | February 21 2012 11:41 EST
We finally have it: the Euro-area ministers have agreed to the additional austerity measures necessary from Greece to tap the second rescue program. Then why hasn’t the euro surged forward?
Dollar Higher on a Day of Fundamental Relief…
On a day that was fundamentally positive for risk trends and the euro, it may come as a surprise to see that the safe haven dollar managed to advance against all of the majors. Yet, at the root of this shift is a sense of relief for a fundamental threat that has been processed to the point of oversaturation (read more on the Greek bailout below). With our favored benchmark for risk trends (the S&P 500) unchanged through Monday, the euro limiting its gains and participation (volume and volatility) levels still surprisingly low; the market awaits something more profound.
Euro: Why is the Market So Reserved after Greece’s Bailout?
We finally have it: the Euro-area ministers have agreed to the additional austerity measures necessary from Greece to tap the second rescue program. Then why hasn’t the euro surged forward? The pressure behind the country’s ability to avoid or succumb to a default has guided not only the euro, but broader investor sentiment for months now. When the positive scenario is finally validated, the speculative drive seems to evaporate. This can speak to a few possibilities: the market fully priced in the outcome, the market is skeptical of the implementation of the necessary measures or the Private Sector Investor (PSI) component sabotages the effort. These are all viable concerns. Considering this was an ‘approval-or-default’ scenario, pricing in a positive outcome was a reasonable move. Now, speculation turns to the subsequent hurdles in implementation and questionable expectations for success with growth and deficits. Immediately ahead, we have to see whether there is a 66 percent participation rate with PSI, if the ECB’s subordination of debt causes concern and whether the Greek Parliament writes off on everything.
British Pound Slides Against Euro, Dollar, Yen Despite Four-Year High Surplus
Once again, the sterling was a mixed bag. However, the performance that really counted for the single currency was its decline against the yen, the dollar and the Euro. From GBPUSD’s retreat, we are measuring the influence of risk aversion. It’s the EURGBP and GBPJPY performances that really interest though. With the news that Greece was off the hook for an immediate default, the edge on the Euro-area financial crisis was dulled. Yet, the euro was the more direct benefactor of this shift in outlook, leading the euro to gain against the sterling and EURJPY over GBPJPY. In other news, the UK posted its biggest budget surplus in four years with the January 7.75 billion take. Yet, despite the improved fiscal position, Cameron remains adamant in caving to calls for stimulus. BoE Member Bean seems to have inadvertently offered support to Price Minister’s stubbornness when he the impact of previous QE has been “quite weak.”
Japanese Yen Traders Hold Breath for Possible Risk Aversion Swell
There was a subtle, risk aversion shift through Tuesday’s session that boosted the yen against its high-yield counterparts. However, the Japanese currency found an uneasy balance against its non-carry counterparts. So far, through the month of February; the Japanese yen has plunged between 4.5 and 5.8 percent against its major counterparts. This is a massive move for the single currency – the biggest in at least 11 months (depending on how you measure it), and the fundamental drive is well founded. That said, this is a safe haven and funding currency. And, the benchmarks for risk appetite are looking suspiciously heavy. It isn’t a coincidence that the recent leveling off on the yen crosses coincides with trouble from risk trends to extend the rally. What happens if risk appetite corrects?
Australian Dollar Sliding Across the Board as Neutral RBA, Risk Off Weigh
The Australian dollar dropped against every one of its most liquid counterparts through the past trading session. There is a notable performance variation in the pairings though that can help guide the close observer to the key fundamental aspects behind the drop. At the upper end of the spectrum, the safe havens (US dollar, Japanese yen and Swiss franc) reflect a budding risk aversion shift that is showing through more prominently here than with equities…for now. For EURAUD, the supposed short-term relief in the approval of the second Greek bailout package shows though with the 0.8 percent rally on the day. And, then there is the relatively restrained decline against fellow high-yield currencies (Canadian and New Zealand dollars). This can trace back to the willingness to further cut rates in the RBA’s recent monetary policy statement.
Canadian Dollar Decline Deviates Notably from Crude’s Surge Higher
Historically, the correlation between USDCAD and US oil prices is exceptionally strong (it was held over -0.75 for most of the past year), but recently the two have taken significantly divergent paths. In fact, in the month of February, we find USDCAD little moved while crude has surged over 11 percent peak-to-trough. The commodity is finding its drive through specific supply concerns in tensions with Iran (the country has cut of oil exports to British and French companies – though is of limited consequence). If there were nothing else for the loonie to worry about, this would be more than enough to drive the currency for the oil-exporter higher. Yet, there is more prominent theme to worry about: risk trends. Crude’s surge conflicts with hesitation on the part of underlying risk trends. And, if the greenback is part of the pairing, risk trends will prevail.
Gold Posts its Biggest Rally in a Week, A Return to Trend?
On a day that was surprisingly mute (contrasting the remarkable fundamental developments), gold was a standout. The precious metal put in for an impressive 1.4 percent rally – the largest advance in two weeks and the fourth best, single-day performance this year. Of further interest was the surge in volume and the pickup in the CBOE’s gold volatility index from seven-month lows. For all intents and purposes, this was a significant move. This could be considered an unexpected move for a number of reasons (it is a rally alongside a dollar advance, the primary headline would suggest risk appetite is approving), but there is a reasonable explanation for this move. Gold is indeed a safe haven asset – it’s positive correlation to traditional risk trends is attributable to an inverse anti-dollar move as the need for liquidity washes away – but it is also an alternative to fiat currency and government bonds that are manipulated by stimulus and intervention. With the approval of the second Greek bailout program, investors are encouraged to diversify funds away from the world’s second most-used currency (the euro). In essence, the precious metal is in good standing in a risk-on build that is based on stimulus or should risk aversion drive traders from speculative assets.
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