Brave New World

FX Lunchtime update- Spotlight on Euro 18/01/2010

The flight from risk witnessed at the end of last week has continued in Asian and morning London trading. EURUSD reached a one week low early in the session and USDJPY dipped lower to below the 90.75 level. Following last week’s monetary tightening by China and the worse than expected U.S. retail sales figures today’s sentiment is driven by the eurozone, in particular the growing worries over Greece and its government’s plans to cut its fiscal deficit. Greek stocks and bonds are lower today and EURGBP is now trading below the 0.88 handle; the lowest since September.

The situation in Greece will presumably dominate the meeting of Eurozone finance minsters in Brussels this week. Greece’s finance minister Papaconstantinou said, “If there is something lacking (in our crisis plan), we will take additional measures.” He added, “As a new government, our priority of re-establishing reliability in our statistics and outlining our growth and stability program has helped create a new climate of hope but there is still work to do.” The sheer scale of the the  task facing the socialist government doesn’t sit well with the track record of fiscal discipline by previous Greek governments. The current plan is to cut the budget gap to 2.8% of GDP in 2012 from a deficit of 12.7% today. This year the deficit is to be reduced by the equivalent of 4% of GDP. Such stringent cuts would test the most socially cohesive and law-abiding society. The fact that Greece has shown a relative propensity for social unrest- witness the riots in December 2008- has led to nervousness among European officials and international investors. Strong words from the ECB and some German politicians about the lack of options have not quelled doubts that Greece will be able to repair its fiscal position. Today’s Daily Telegraph reports that the ECB has issued a document titled: “Withdrawl and explusion form the EU and EMU”. A long hot summer of rioting on the streets of Athens will do little to give investors confidence in the country or the periphery of Europe and will lead investors to speculate that Greece will be the first country to leave the eurozone. And with it the potential for further countries to exit. In any case, the position of the Euro is looking increasingly precarious.