By Omer Esiner of Travelex
The U.S. dollar rose to a one-year high against the euro overnight before Greece's Prime Minister officially requested the activation of a financial aid package from the EU and IMF. Athens' ability to finance its huge deficits has become increasingly hampered by the rising cost of borrowing imposed by financial markets.
Greece's intensifying debt crisis appeared to reach a zenith yesterday after Moody's downgraded Greece's sovereign credit to just four notches above "junk" level. The resulting blowout in credit spreads between Greek and benchmark German bunds highlighted the unsustainable state of the situation and forced Athens to request external assistance.
While the euro may find some near-term respite from the intense selling pressure of recent weeks, the uncertainty regarding the conditions that any financial support would come with should continue to keep its upside severely limited. This weekend's G20 and IMF meetings in Washington could provide new details on assistance for Greece.
A softer-than-forecast reading of Britain's GDP for the first quarter had little near-term impact on the pound. Still, the report should underscore the notion that speculation this week about a lending rate hike by the BOE sooner than previously expected may have been premature.
Comments from the sidelines of the G20/IMF meetings will be closely watched.
: The euro briefly fell to a new one-year low against the greenback overnight, a 30-month trough against the Canadian dollar and a two-month low against the British pound before Athens formally requested the aid package from the EU and IMF be activated.
Yesterday's downgrade of Greece's sovereign rating sent credit spreads and the cost of insuring Greek debt against default soaring. It also pushed the cost of borrowing for Athens further into unsustainably high levels. Greek Prime Minister George Papandreou made the formal request for aid overnight, citing intensifying market pressures, which raised significant risks to the government's proposed fiscal reforms.
Aid for Greece should buy Athens some time in getting its fiscal house in order, but will do little to address structural issues that have lead Greece, and other peripheral euro zone states down the path of fiscal irresponsibility. Consequently, any near-term bounce in the euro will be seen as another selling opportunity.
Data overnight, showing soaring German business morale, which rose to near a two-year high, as well as much better-than-forecast euro zone industrial orders had little impact on the markets, but did highlight how the 16-member bloc's recovery has actually benefited from the Greek debt crisis and the subsequent drop in the value of the euro.
: Sterling pared some of its recent gains after GDP data showed the British economy grew by only 0.2%(q/q) in the first quarter, which was just half of the 0.4%(q/q) forecast. The year-over-year decline in Britain's economy slowed from 3.1% in the fourth quater to 0.3% in the first quarter. Upside surprises to recent economic data have suggested that growth in the first quarter would have been higher.
However, officials have cited a very harsh winter as one key factor that undermined overall growth in the U.K. in the first three months of 2010. The impact on sterling was minimal, given that the first reading of the nation's GDP is often revised up. Still, the data does suggest that speculation on a BOE interest rate hike sooner than previously expected was likely premature.
: The AUD succumbed to selling pressure after RBA Governor Glenn Stevens said that interest rates in Australia are getting close to "average." His comments dampened some of the market's aggressive RBA rate hike expectations and undermined some of the AUD's recent yield appeal.
: The loonie pared some of its recent gains across the board after data this morning showed cooler-than-expected inflation and softer-than-forecast consumer spending. CPI was flat in March vs. expectation for a 0.3%(m/m) rise. Ex-food and energy, CPI actually declined by 0.2%(m/m). Retail sales rose by 0.5%(m/m) in February, which undershot expectations for a 0.8%(m/m) rise. Ex-autos, sales actually fell by 0.1%(m/m). More disappointing data over the coming weeks could dampen expectations for a BOC rate hike in early June and dull some of the CAD's recent luster.
Omer Esiner serves as the Senior Currency Market Analyst at Travelex, Inc. a global financial institution specializing in corporate foreign exchange services and international payment solutions. In this capacity, he monitors, analyzes and interprets the economic, financial, political and technical factors that drive the movements of more than 100 currencies for Travelex. Mr. Esiner explains the currency markets' reaction to market events to clients, employees and members of the media.
You can view his daily reports, recording briefings, and quarterly reviews posted
. As an expert in foreign exchange, Mr. Esiner is quoted regularly by the financial media including The Wall Street Journal, CNN, Dow Jones Newswires, Reuters, the Nightly Business Report, National Public Radio, among others. Based in Washington, D.C., Esiner joined Travelex in February 2000. Prior to his current position, Esiner was a currency trader for several years. Mr. Esiner holds a bachelor's degree in economics from the University of Maryland, College Park. He is fluent in Turkish and proficient in Spanish.