Could Merkel Be Trying to Bring the Euro Down a Bit?

The Germans broke rank with the rest of the EU and suggested Greece should turn to the IMF for support. The euro (EUR) had rallied over the past couple of days after it seemed the EU finance ministers had agreed on a loan facility to back the Greek government. But Germany’s Angela Merkel threw a cat among the pigeons today when she said Greece should not look to the EU but should turn to the IMF if it needs aid. So traders immediately started selling the euro again as the black cloud of a possible Greek default fell back over the market.

I have to question the German Chancellor’s timing on this announcement. Could it be that she is simply trying to bring the value of the euro down a bit? After all, Germany’s economy is dependent on exports, and a lower euro is a big plus for the German economy, which continues to pull out of recession. We already knew where she stood on the Greek crisis; as she has made it clear in the past few weeks that she is not supportive of an EU bailout. But the markets had started to move past this, convinced that the two-day summit of finance ministers held at the beginning of the week had produced a good plan to deal with the Greek debt problem. If euro stability is what she wanted, Merkel could have simply stayed quiet, knowing she could oppose funding any loans if/when they became necessary.

Just the appearance of backing by the EU had helped calm the markets, and brought down the cost of refinancing for Greece. Investors had assumed the EU would be supportive, and had begun to return to investments in the euro. But Merkel has blown away investor confidence with her statement.

The Greek Prime Minister is trying to hold things together and assure the markets that the spending cuts will be successful in bringing down their deficits. He is still claiming that no actual ‘bailout’ will be needed, and says he just wants the ‘political’ support of the EU. But the markets are still convinced that someone will have to step up and loan funds to the beleaguered country and continue to sell the euro. Could this be just what Merkel wanted?

The Canadian dollar (CAD) continues to move closer to parity, as investors are expecting interest rates to move higher soon in order to combat rising inflation. Inflation data will be released tomorrow in Canada, and they are expected to show that prices in Canada are moving up faster than here in the US. The BOC said earlier this month that inflation and economic output were higher than expected, a signal that policy makers would likely be raising rates sooner than Ben Bernanke and his compatriots on the FOMC.

Speaking of our Fed Chairman, I got a chance to watch a bit of Ben Bernanke’s testimony regarding the Dodd Financial Reform bill yesterday in the airport. Bernanke and former Fed Chairman Paul Volcker were in front of a Senate committee to argue against what has been termed the ‘Dodd Bill’ for financial reform. The main thing Bernanke is opposed to is the stripping of Fed oversight from all but the largest banks. The bill would basically make the Fed only responsible for regulating the ‘too big to fail’ banks, and move the regulation of smaller financial firms to the FDIC. Both regulators were asleep during the latest financial crisis, so does it really matter who gets to be in charge of the medium and smaller banks? While this bill will have a major impact on the US financial system, it won’t really impact the currency markets, the dollar will continue its long-term slide lower no matter who is in charge of regulating the banks.

China was in the news again overnight as it was reported that the government has banned loans to developers hoarding land to wait for higher prices. I guess that is how the communist regime has decided to deal with the real estate bubble, simply choke off the financing to the speculators it feels are driving the prices higher. This has sent shock waves through the Asian markets as they are totally dependent on a strong Chinese economy.

This news will likely weigh on the Aussie dollar (AUD) and kiwi (NZD) as investors move into a more defensive position. The big benefactor of the news overnight has been the Japanese yen (JPY) which is again being touted as a ‘safe haven’ parking spot for cash. I have a bit of a problem looking at the yen as a ‘safe haven’ and believe the move higher by the yen is not because investors feel safer in the yen, but rather it is due to reversals of the carry trade. As investors worry about the global economy, they move out of higher yielding assets and reverse the leverage that enabled them to make these investments. The funding currency of many of these carry trades is the Japanese yen; so the yen moves higher as these investors purchase the currency to pay down their loans. This carry trade continues to have a major impact on the currency markets.

The data released in the US yesterday morning showed the PPI moved down a bit in February. The producer price inflation fell 0.6%, roughly double the forecast of economists. This was the biggest decline since July, and was brought down my lower energy costs. This plays right into the FOMC’s announcement earlier this week, as price increases appear to be non-existent. But the year over year figure shows prices are rising, as PPI was up 4.4% in the last 12 months.

Today is a big data day here in the US, with the release of CPI, the Current Account Balance, Leading Indicators, along with the weekly jobs data. CPI is expected to show consumer prices are stable, so the markets will likely focus on the jobs numbers. The weekly numbers have remained stubbornly high, remaining above 460K. Last week the data showed claims moved down a bit, but not enough to keep the four-week average from moving higher. Economists expect this morning’s numbers to show claims moved down to 455K, seven thousand less than last week’s 462K.

This data is being closely watched since the FOMC has made it apparent that they will not be moving on interest rates until some progress can be made on the jobs front. The 4-week moving average of job loss peaked in April of last year, and steadily declined through January of this year, but has been moving back up since. Another weak jobs report should be negative for the US dollar, as it will help tear down the argument that the FOMC will be moving rates higher sometime soon.

By Chris Gaffney

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