Greece back in the spotlight

Publication date: 20 August 2012
Author: Michael Derks, FxPro

Greece is back in the spotlight this week with a number of high-profile meetings between PM Samaras and various European leaders. Angela Merkel meets with the Greek leader on Friday; she is also due to sit down with French President Hollande the same day. Greece is seeking to extend the timeframe of its adjustment program. For its part, Merkel’s CDU seem in no mood for any further compromise – for instance, the parliamentary leader of the CDU-CSU stated over the weekend that there was no room for any more latitude, and that if Greece were to fall into bankruptcy then it would be expensive but manageable. Ahead of these meetings and discussions, the euro is simply marking time, although on Friday there was a remarkably rapid descent to below 1.23 before some buyers re-emerged. Elsewhere, the Aussie still looks a bit fragile – it recovered somewhat overnight to the 1.0450 region, but has had a few looks at the 1.04 level over the past couple of days. Tonight’s RBA Minutes from the most recent meeting will be critical for the AUD in the short term. Cable is still perched around the 1.57 area, unmoved by a report from Rightmove overnight which showed that house prices dropped a further 2.4% this month after a 1.7% decline in July.

China still stuttering. For all of the official assurances that the second half of this year will be better for the Chinese economy, thus far the evidence in support of this contention is thin. July was another tough month, with both industrial production and loan growth continuing to slow, and export growth down to a miserly 1% YoY. Meanwhile, non-performing loans in China continue to grow, surging for a third straight quarter in Q2. Overseas investors are becoming increasingly circumspect about China as well – foreign direct investment dropped by 9% YoY in July – and the capital account deficit in the second quarter was the highest since 1998. These concerns over China are crimping demand for the currency – yuan positions at Chinese lenders accumulated from sales of foreign exchange to the PBOC fell again last month. The renminbi has depreciated by 0.65% against the dollar so far this year, and it is one of the worst-performing Asian currencies of 2012. Moreover, traders expect a further depreciation of the renminbi – 12mth NDFs are trading at a 1% discount to the yuan reference rate. Although Prime Minister Wen Jiabao recently remarked that downward pressure on the economy remained “relatively large” and that there was “growing room for monetary policy operation”, Chinese policy-makers have not shown the urgency that the situation demands. In particular, it remains something of a mystery why the PBOC has not lowered the bank reserve requirement (currently 20% for the large banks) over the past three months. Certainly, interest rates were lowered twice within a few weeks over mid-year, but the PBOC seems less convinced that inflationary tendencies have been purged from the economy. No doubt the central bank will be watching how higher prices for soybeans and wheat translate through into food prices over coming weeks and months. Still, from afar, the PBOC does appear to be prevaricating.

Aussie woes. The mood towards risk may be mildly sanguine during these tranquil summer trading conditions but interestingly the Aussie is not getting any benefit. Indeed, the tone has turned somewhat circumspect. After yet another unsuccessful attempt at breaching the 1.06 level last week, the AUD has gradually lost traction and on Friday fell back to near the 1.04 level. One major catalyst for the Aussie’s recent demise has been some large stops being triggered in EUR/AUD. Shorting this cross was a favourite trade of the hedge fund fraternity over the past three months, but some are clearly deciding to retreat to the sidelines after a very good run. EUR/AUD is near 1.1820, up from 1.16 at the start of last week. In the short term, it should not be a surprise to see the AUD test the 50d and 200d moving average, both of which come in at around the 1.0290 level. As we observed recently, a lot of traders were sitting on lazy longs in the Aussie, and there was significant potential for these to be liquidated, a process which now appears underway.