Again the Greek debt problem has been in the spotlight this week. Traders as well as the politicians involved have been in a party mood, having successfully kicked the can down the road. Frau Merkel is hopeful a Greek default is no longer a possibility, and German taxpayers will not be made aware, they may become obligated to pay for some of the Greek losses.
The celebration, however, may be premature. Included in the deal is a bond "buy back" scheme where Greek bonds owned by the private sector will be sold back to the government. Since the market value is about 30% of face value, this amounts to another severe loss for the bond owners. The IMF has said they will not disburse their funds to Greece unless the buy back system works, and thereby reduces the amount of the Greek debt.
It was reported by Ambrose Evans-Pritchard in the Telegraph yesterday:
"Private investors are furious at demands that they take a second "haircut" of 70pc on residual holdings, after already taking a 53.5pc loss earlier this year, while official creditors still refuse all loses.
Greek banks told finance minister Yannis Stournaras on Thursday that they cannot take part in the "buy-back" plan unless the Troika-imposed terms of Greece's bank recapitalisation scheme are relaxed. They still hold €22bn of Greek bonds, mostly used as collateral for raising money under the European Central Bank's emergency liquidity assistance (ELAs)."
Currently the euro seems to be trading like the Greek debt issue has been attended to, and concern now is focused being the U.S. "fiscal cliff." There will be no quick and easy solution because the two political parties involved have conflicting views about the size and role of the federal government.
The EU area unemployment came out at 11.7% today, another record high. Next Friday the U.S. Non-Farm Payroll will be released. The early guesses are 90K new hires, and unchanged U.S. unemployment, 7.9%. There will be other economic reports on both side of the Atlantic next week, but with the looming NFP report, the never ending Greek drama, and the U.S. political negotiation, it be an eventful week.
We are currently trading the EURUSD (FXE, UUP) around the 1.30 handle. Looking at the weekly chart there appears to be solid resistance around the 1.30/31 area. Next Friday the December options expire. My guess is there are a lot of traders who would like to pin the Friday close at the 1.30 level.
The Aussie trade has been essentially trend less going back to July, unable to get too far from the 1.04 handle. On December the 4th we get the Reserve Bank of Australia Rate Statement. The trade anticipates the rate will be reduced 25 basis points to 3%. It is difficult to imagine circumstances that will propel this market sharply in either direction, but should there be a big set back we want to be a buyer of the Aussie.
Part of the commodity boom may be slowing, demand for iron ore for example, but the coal demand remains, and the race is on to develop terminals for the exportation of Liquid Natural Gas. The Chinese government has targeted the commercial transportation sector to convert to the cheaper and more efficient LNG. It is estimated they have one million vehicles that currently run on LNG.
We are not yen friendly, but are cautious because of the explosive growth of interest in the short side of the yen. In the futures markets, the total yen open interest now exceeds the OI in the euro.
The recent bear stampede is in response to the forthcoming December election which has the challenger, Liberal Democratic Party leader Abe, ahead of the incumbent PM Noda. Abe wants to increase the Bank of Japan's money supply, end deflation, and take inflation to 3%.
Responding to the moribund economy, and the political challenge, PM Noda did announce a $11B stimulus package today. This may have caused some yen selling today.
The Japanese sovereign debt load is 230% of the GDP, and currently 10 year bonds yield .73%. Should the inflation rate goes to 3%, what will the 10 year then yield? If elected the new PM Abe had better give that scheme further thought.
The weekly chart shows a nice saucer bottom. The initial target for this move is the top side of 84. Interesting to note the 200 week SMA comes in just above 85. In an ideal world, we would like to sell the yen should there be a little strength and we shake some shorts out. Then because of the unsettled U.S. fiscal fight, we would rather own the AUD versus the yen. Next week should be interesting.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.