Island Shouts 'No!"
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Reason
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moneynewsonline
Voters in tiny Iceland have defied their parliament and international pressure, resoundingly rejecting a US$5.3 billion ($7.4 billion) plan to repay Britain and the Netherlands for debts spawned by the collapse of an Icelandic bank, in a move that threatens to derail international support for the country's crisis-hit economy.
Returns released yesterday show that 93 per cent of voters said "nei'' or "no" in Saturday's referendum, and just 1.8 per cent voted yes. The rest were blank or spoiled ballots.
Britain and the Netherlands want to be reimbursed for money they paid their citizens with deposits in Icesave, an Internet bank that collapsed in 2008, along with most of Iceland's banking sector. However, ordinary Icelanders say the repayment schedule was too onerous.
The Bill would have saddled each citizen with US$16,400 of debt. Some Icelanders set off fireworks in the capital, Reykjavik, as the referendum results were announced.
The resounding rejection reflected deep public anger over a deal which critics said would punish taxpayers for the mistakes of bankers and regulators and pile more debts on a country of 320,000 people struggling to rebuild its shattered economy. The failure to reach an agreement on the Bill has left Iceland's International Monetary Fund-led loan in limbo and prompted Fitch Ratings to cut its credit grade to junk. Moody's Investors Service and Standard & Poor's have signalled they may follow.
Voters rejected the Bill because "ordinary people, farmers and fishermen, taxpayers, doctors, nurses, teachers, are being asked to shoulder through their taxes a burden that was created by irresponsible greedy bankers," said President Olafur R Grimsson, whose rejection of the Bill resulted in the plebiscite, told Bloomberg. Mr Grimsson, who has described his decision to put the bill to a referendum as the "pinnacle of democracy" says he's not concerned about the economic fallout of his decision.
Perhaps most vulnerable after Icelanders' massive "nei" vote is the future of the country's left-wing government, which negotiated the agreement considered by many as little more than a foreign diktat.
"The government stands weak after this result," said Mr Eirikur Bergmann Einarsson, a political science professor at the Bifrost University.
Finance Minister Steingrimur Sigfusson, who has headed up talks with Britain and The Netherlands, had in particular "put his political life on the line, and the life of the government is hanging by a thread", said the professor.
The government "needs to face a nation which has rejected the solution (it) offered", Mr Einarsson said. He said the referendum results should also send a clear message to Britain and The Netherlands that: "Iceland will not be bullied into an unjust agreement."
The outcome will force the three countries back to the negotiating table after more than a year of abortive efforts to solve a dispute that has held up crucial loans from the International Monetary Fund and cast a cloud over Reykjavik's bid to join the European Union.
The bill would have obliged the island to take on US$5.3 billion, or 45 per cent of last year's economic output, in loans from Britain and The Netherlands to compensate the two countries for depositor losses stemming from the collapse of Landsbanki Islands more than a year ago.
Dutch Finance Minister Jan Kees de Jager in a statement posted on the Internet said he was "disappointed" the agreement hasn't yet come into effect. The British were "obviously disappointed", while "not surprised", said a Treasury official who declined to be identified.
The three governments have declared their intention to continue the talks.
Tags: Island, Money, Back, Netherlands, Britain, Vote
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€uro falls against US$, AU$ rises against £
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Reason
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moneynewsonline
The euro fell to fresh daily lows against the U.S. dollar, the yen and the pound on Monday, after the European Union denied a report that euro zone nations could provide Greece with an EUR 20-25 billion bailout.
EUR/USD fell to 1.3574 during European afternoon trade, a fresh daily low; It subsequently bounced back to 1.3593, still shedding 0.13%. The pair was likely to find support at 1.3445, Friday's low and a 9-month low, and resistance at 1.3839, the high of Feb. 9.
Meanwhile, EUR/JPY tumbled 0.49% to hit 123.97 and EUR/GBP dropped 0.32% to reach 0.8770.
Earlier in the day, European Commission spokesman Amadeu Altafaj told a news briefing that, "I have no comment on such a plan that does not exist and is denied even by the alleged source of it."
On Saturday, the German weekly Der Spiegel said Germany's finance ministry had drawn up a plan for euro zone nations to provide debt-laden Greece with aid the multi-billion euro aid package.
Fears over Greece's gaping budget deficit have hurt the euro in recent weeks.
Meanwhile, the Australian dollar surged to a 25-year high against the pound on Monday, as Australian stocks rose on stronger commodity prices.
GBP/AUD plummeted to 1.7128 at the start of the Asian trading session, breaking below a key support level at 1.72; it subsequently hovered around 1.7206 during European morning trade.
The pair was likely to find resistance at 1.8280, the high of Feb. 4, and support at 1. 7128.
Earlier Monday, Australia's S&P/ASX 200 Index climbed 1.78% amid firmer commodity prices and in the wake of a report Saturday that the German finance ministry had prepared a plan for euro zone nations to bail out debt-ridden Greece.
Meanwhile, official data showed that the sale of new motor vehicles in Australia was down by a seasonally adjusted 3.4% in January compared to the previous month.
Tags: Pound, Dollar, US, USA, Aus, Australia, Forex, Up...
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Currency News
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Reason
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Editor
G10 Currencies
EUR: The EU's extraordinary summit on 11th February has become an even hotter topic since it has become known that ECB governor Jean-Claude Trichet will leave a conference held by the Australian central bank one day early so as to be able to attend this summit. In the current environment this is obviously giving rise to rumours. Will a bailout of Greece and/or support for the other EU countries with budget difficulties be decided as early as 11th February? Hardly surprising therefore that the CDS spreads are going on a rollercoaster ride in the current climate. Greece's 5 years CDS fluctuated by over 20bp yesterday, while Portugal's CDS reached new highs. How interesting that EUR-USD has hardly moved at all in this environment, as this confirms the picture that the positioning indicators have been painting (see Daily Currency Briefing dated 08.02.): Price sensitive market participants are likely to have built such high EUR shorts that the news which usually has a marginal effects on the EUR-USD exchange rate is hardly having an effect any longer at all.
• Greece-positive news is not having an effect as it is not sufficiently significant to question recently established EUR shorts.
• Greece-negative news is not having an effect as anybody who can is already positioned in that direction. This pattern of dampened market reactions should persist until important news about the EU summit (or other important news about a possible bailout) force speculative market participants to review their positioning. In this sense the low intraday volatility of the past 24 hours is a kind of calm before the storm.
GBP: EUR-GBP is the currency pair that can still move with some sensitivity without being squashed by excessive positioning. As a result the marginally positive news fuelling hopes of a bailout are having particularly positive effects in this area. News from Great Britain on the other hand are taking a back seat at present. Last night's RICS house price index which came in above expectations, was therefore ignored by the markets.
JPY: Machine tool orders in Japan have almost tripled yoy (+192%) – what a spectacular performance. The data has to be taken with a pinch of salt though as January 2008 was a disaster for this data series, recording a collapse of almost 84%. If hardly any orders are taken it is easy to triple them. So not a sign of the rapid recovery of the Japanese economy. The yen has hardly been able to benefit from local factors, only the flight into a safe haven is supporting the currency. We expect hardly any news on this front short term (see above).
Emerging Market Currencies
CNY: The rise of the USD-CNY-NDF (see Daily Currency Briefing dated 08.02.) was short-lived. Yesterday Vice Commerce Minister Zhong Shan hinted that the authorities would accept larger flexibility of the USD-CNY exchange rate. This supported those market participants who are relying on an appreciation of the renminbi. His comments did however sound as if he was not thinking of a long term appreciation trend but of a relatively small range in which USD-CNY could move. It is indeed quite attractive from a Chinese point of view to allow a moderately higher level of fluctuations. This could be sold as “increased flexibility” thus reducing political pressure on the regime in Beijing without putting any sustainable pressure on the export sector.
TRY: The Turkish central bank published the results of its current poll of inflation expectations yesterday. The poll demonstrates: Inflation expectations for the end of 2010 have risen dramatically again. While in December they still amounted to 6.27%, companies and banks are now expecting a rate of inflation of 7.50%. For the time being the Turkish central bank is still considering the recent rise in the rate of inflation to be a temporary phenomenon which is only due to tax rises and will therefore end soon. We are more sceptical. The analysis of the cause may be correct, we see a danger though that the inflationary one-off effect might now develop a momentum of its own. The effect on inflation expectations has been proven with yesterday's publication of the inflation data. Rising inflation expectations are also likely to lead to an increase in company price setting. Do not forget: In Turkey periods with a rate of inflation of around and above 100% (as recently as 1998) have not been forgotten. The rate of inflation only fell below 20% in 2003. In view of this relatively recent experience and in view of the fact that price indexing could become wide spread again inflation expectations could easily lead to real inflation – unless the central bank prevents this. But that is not on the cards at present. In the near future the central bank might have a shock in store in the form of high rates of inflation. A higher rate of inflation always has diverging effect on exchange rates. On the one hand it leads to higher interest rates, while on the other hand reducing the internal value of a currency thus potentially limiting its external value. In the case of Turkey the negative effect is likely to be dominant initially, as the central bank will probably hope for some time that the “special effects” will run out. It is therefore likely to react too late rather than raising rates prematurely.
UAH: The presidential elections have been decided, but that has not solved the country's difficulties. The winner of the election Victor Yanukovych will not hold a majority in parliament and might aim for parliamentary elections. Moreover it is still unclear whether Yanukovych's opponent Prime Minister Yulia Timoshenko will concede defeat without a fight. She might contest the result in front of the constitutional court. There are accusations of election engineering. So political chaos persists and thus the danger of the IMF aid payments remaining suspended.
Tags: Currency, Euro, Sterling, G10, News, Headlines
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3 Dec: Trading, Equities, Forex and Commodities
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Reason
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Editor
TRADING
Thursday has been an eventful session with the ECB keeping key interest rates steady as expected, but taking additional steps to remove longer-term extraordinary liquidity injections. EZ and U.K. Service PMIs suggested that those economies continue to expand, but they are by no means racing away.
U.S. data were mixed with Weekly Jobless Claims holding onto their improvement achieved in the prior week. On the other hand, the ISM Service PMI outcome was a disappointment. The employment subcomponent of the Service PMI did not show the improvement that had been hoped for and caused many economists to become less optimistic about non-farm payrolls on Friday. The U.S. economy remains on a slowly improving track.
The Bernanke confirmation hearings before the Senate Banking Committee turned out not to be as incendiary as many had expected. There seems to be little doubt that he will be reconfirmed, although a few might make some noise about it.
This remains non-farm payroll week and the anticipation of the data has seen many forex traders retreat to the sidelines. Earlier in the session a comment by the Obama Press secretary was apparently misinterpreted by a wire service to have been a hint that the unemployment rate for November due tomorrow would be higher. Although that interpretation was said to be incorrect, earlier euphoria about the upcoming report has faded. We hear that the -120K consensus estimate for job losses now might now be closer to -160K.
Interest in trading the employment release seems to have waned recently as most at one time or another have been burned by the extreme volatility. For forex traders the key question will be how the data will impact stock prices. We expect the equity to stock correlation to continue to work. From the perspective of forex traders, the USD tends to follow equity prices, rather than vice-versa which we hear frequently from equity market analysts.
EQUITIES & INTEREST RATES
Far East equity markets closed mostly higher. European bourses ended lower. U.S. equity futures (electronic) are up. Higher equities continue imply a lower USD.
The U.S. 10-yr note is 3.3%, +6 bp. This was a weak session for the fixed income markets. Fed Funds will be low for an extended period of time.
FOREX
EUR/USD is closing higher on the day. The equity correlation trade has only been working off and on today. The EUR is mixed on its major crosses.
EUR/CHF is steady. USD/CHF is lower. EUR/CHF 1.50-1.53 SNB band.
USD/JPY is higher, and the EUR/JPY is sharply better. Japanese forex policy might be moving in the direction of containing the JPY. The government and BOJ might be reconciling their differences.
GBP/USD is weaker. EUR/GBP is up. Mixed data have been triggering GBP instability. BOE King recently indicated that a weaker GBP could contribute positively to U.K. economy.
COMMODITIES
The CAD is weaker. Canadian employment data and the Ivey PMI are due on Friday. The AUD and NZD are higher. Risk trades keep cycling in and out. The RBA is likely to hike rates next in February. Rumors the RBA intervened in the AUD today. Gold and Oil are lower. Gold, oil, equities and the commodity currencies are all carry trades vs. USD. Gold is another anti-dollar.
Tags: Stocks, Trading, Commodities, Forex, Equities, Cl...
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Spending Cuts Won't Derail Recovery
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Reason
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Editor
Recessions usually end with a whimper rather than a bang. They peter out as downward momentum fades and the levers turn from negative to positive. What was a torrent of bad news becomes matched, then bettered, by good news.
That is the process we have been going through for a few weeks, as I noted a fortnight ago in my piece on the stock market. The National Institute of Economic and Social Research estimates that the economy hit bottom in May, which chimes with surveys such as those from the purchasing managers.
Industrial production figures from the Office for National Statistics (ONS) gave a solid hint that it will declare the recession over next month, when releasing its first estimate of third-quarter GDP.
You cannot rule out the ONS bowling another googly, as it has a few times recently, but the evidence is against it. Industrial production, on which it has the fullest information at this stage, is significantly above its second-quarter average and service-sector surveys have been upbeat.
A return to growth now will tell us a few things. On currently available information, the recession has been twice as bad as in the early 1990s but not as severe as in the 1980s. The proviso, which I repeat, is that recent figures are likely to be revised up.
A positive GDP number this quarter will also mean that, despite everything, the recession will have been of normal length — five quarters. Its unusual feature was the “falling off a cliff” moment between October and April, for Britain and many other economies, as global trade collapsed. UK GDP fell 4.2%, a record over two quarters.
For many months I have been talking of the battle between the banking shock and the aggressive policy stimulus, particularly big cuts in interest rates but also quantitative easing. I thought the stimulus would win out in the end, and it has.
Now the question comes on to how sustainable the upturn will be. That is worth a series of articles and I shall return to the banks and what happens when the monetary policy stimulus comes off.
This week, however, let me address it in the context of the topic of the moment, public spending. The government's tone on spending has shifted, thanks to the efforts of Alistair Darling.
Instead of Gordon Brown's “investment versus cuts”, the debate is “our cuts will be less damaging to services than yours”. The chancellor, giving the James Callaghan Lecture in Cardiff, made the point that the state's enabling role in the economy does not apply only in times of crisis. On spending, though, he used the “c” word: “more efficiency, continuing to reform, cutting costs”, which is a step in the right direction.
In the Treasury, the public-spending division is working at full pelt, going through programmes. There will be no comprehensive spending review and all that is certain in the autumn pre-budget report is that the spending “envelope” will be extended for another year until 2015. The official machine, however, stands ready to cut.
David Cameron promised a £120m cut in the cost of parliament, neither here nor there in the grand scheme of things but designed to show intent. George Osborne, shadow chancellor, has promised to learn lessons from councils that have cut spending without undermining services.
The shift in the political debate is welcome, and makes the loss of Britain's AAA sovereign debt rating even less likely. Outside government, meanwhile, the spending debate is intensifying. The Institute of Directors, with the Taxpayers’ Alliance, have proposed more than 30 measures that would cut public spending by £50 billion.
It does not sound much when public spending is £671 billion but it shows how tough the choices may become. Labour sacred cows such as Sure Start and Building Schools for the Future would go and spending on private consultants would be halved, something that might not go down too well with all members of the Institute of Directors.
This week the Institute for Fiscal Studies will set out options involving tax rises, general reductions in spending and specific cuts in welfare to reduce the deficit. Robert Chote, its director, points out that the battle between the Tories and Labour over who will tighten first is rather phoney.
Even without further surgery, Treasury plans imply departmental spending will rise only £3.2 billion, or 0.7%, in 2010-11. Allowing for inflation, that means real cuts. The government needs recovery to be established or risks being accused of cutting when the economy can least take it.
This raises a general point. Can public spending be tightly restrained without seriously undermining recovery? Has not Britain become so dependent on the government that once the taps are turned off the economy will be becalmed? The answer is no and, indeed, periods when public spending has been held down have tended to be times of good economic growth.
Looking back on the recent past, the arithmetic tells us that even when public spending is rising strongly, it makes a modest contribution to growth. 2000 to 2008 was Gordon Brown's “splurge” period, when public spending grew roughly 4% annually in real terms, well above the economy's overall rate of about 2.5%.
Over that period, GDP rose £224 billion, just over 20%, in real terms. Government spending rose by just over £50 billion. It contributed only just over a fifth of growth even when ministers were spending fit to bust. This kind of static comparison, more-over, probably overstates the public contribution. Had spending not risen, and the taxes needed to pay for it, private-sector growth could have been stronger.
This is the way to look at it for the future. A paper by Goldman Sachs, called Fiscal Consolidation and the Exchange Rate, argues that in an open economy like Britain's, public-spending cuts affect the composition of economic growth but not its pace. This is because sterling is a safety valve.
A tightening of fiscal policy, accompanied by a weak currency, means that what you lose in government spending, you gain in exports. Sterling is well below fair value against the euro, so this effect is ready to roll as the global economy picks up.
Nor is this just theory. “It is worth looking at what happened to the economy the last time the UK tightened fiscal policy aggressively, during the mid-1990s,” write Ben Broadbent and Adrian Paul of Goldman Sachs. “It performed well. Coming out of deep recession, and aided by a small acceleration in eurozone activity and a big decline in the currency, investment and exports bounced strongly. Aggregate demand grew by 3.5% a year.”
This time it may be different, for other reasons. But we should not worry unduly that putting the brakes on public spending will kill recovery.
Tags: Spending, Recovery, Cuts, Recession, Government, ...
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Forex Market - 4 September
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Reason
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Editor
Another day of indecision in currency markets yesterday, despite numerous risk events
Will today's non-farm payrolls be the last chance for a breakout?
MAJOR HEADLINES – PREVIOUS SESSION
US Weekly Initial Jobless Claims out at 570k vs. 564k expected and 574k prior
US Weekly Continuing Claims out at 6234k vs. 6130k expected and 6142k prior
US Aug. Non-manufacturing ISM out at 48.4 vs. 48.0 expected and 46.4 prior
JP Q2 Capital Spending out at -21.7% vs. -23.0% expected and -25.3% prior
JP Q2 Capital Spending ex-Software out at -22.2% vs. -27.5% expected and -25.4% prior
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
EU ECB's Trichet to speak (0600)
Swiss CPI (0715)
CA Unemployment Rate (1100)
US Non-farm Payrolls (1230)
US Unemployment Rate (1230)
US Avg. Hourly Earnings (1230)
CA Ivey PMI (1400)
EU ECB's Nowotny to speak (1430)
Market Comments:
The doves were out in force overnight with both the Riksbank and the ECB surprising the markets with the tone of their respective accompanying statements. While it looked like momentum was building to challenge (dare we suggest break) the rock-solid walls of recent ranges but this was not to be. In the end, we endured another day of indecisiveness in currency markets and the ranges prevailed.
The US data releases were a mixed bag. Initial jobless claims were slightly worse than expected, at -570k versus -564k, but also the previous week's numbers were revised higher. The non-manufacturing ISM data on the other hand was better than expected, improving to 48.4 from 46.4 but it was still not time to pop the champagne corks as we are still in contractionary territory below 50 for this sector, unlike the manufacturing side which soared to 52.9 in August.
With all eyes on the US unemployment and non-farm payroll data this evening, the Asian session was a quiet affair. We saw tight ranges in currency markets and equity markets were slumbering close to flat. In his speech in California, Dallas Fed President Fisher continued to paint a subdued outlook for the US economy, expecting a lengthy period of sluggish growth with unemployment remaining “uncomfortably high” for some time. Still, he expects a “good snap back” in growth over Q3 and Q4 but was worried over the trajectory of the economy beyond then. Moving onto rates he certainly was not hawkish, stating that it was too early to guess at the timing and pace of any Fed rate hikes. Indeed, he still believes deflation rather than inflation is the biggest risk to the US economy.
There was very muted reaction to news on the geopolitical front. North Korea declared through its official news agency that it is “weaponizing” plutonium and in the final stages of enriching uranium. The decision to push ahead with its nuclear programs a reaction to UN Security Council sanctions against the regime for testing a nuclear bomb last May. Note the announcement is also timed one day after a US special envoy arrived in Beijing for talks on how to bring North Korean back on track with its nuclear disarmament process.
Into the European session we will see Swiss CPI and speeches by ECB chief Trichet on policy and the Euro-zone economy. Canada's unemployment numbers set the ball rolling in North America but US non-farm payrolls and unemployment will be the headline grabbers. For the record, the unemployment rate is expected to tick up to 9.5% while non-farm payrolls are seen falling by a median 230k. Note however that the range of estimates vary from -100k to -365k. Canada's PMI data rounds off the week.
Over the next 2 days G-20 finance ministers and central bank governors will be meeting in London. Consensus seems to be building that it is currently still too early to start removing stimulus and a premature removal could threaten the global recovery. “Green shoots” are still just being seen as green shoots. While a discussion of potential exit strategies may be on the agenda, it is unlikely that these will feature heavily in the communiqué. Currencies also have been lackluster of late and hence unlikely to grab the headlines.
Tags: Forex, Headlines, News, Themes, Comments
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