The “currency twins” are telling us that there is currency flight from the Euro

As yet another Euro zone summit makes its way into the distance like a shower on a hot summers day we are left with quite a few ongoing problems. I have reported on various occasions that the Greek debt haircut or Private-Sector Involvement deal looks as though it is going badly. In spite of a chorus of reports from the mainstream media that a deal is “just around the corner” we have seen that this particular corner has extended from late October to nearly February. Signs of a deal?Well take a look at this I have just published on twitter.

Hopes for a Greek debt deal have to face up to a one-year bond yield of 454% today! Thats 453% over Germany’s!

As there is potentially plenty of profit here perhaps we should have a  twitter #putyourmoneywhereyourmouthis for journalists who keep pursuing the party line.

Portugal follows Greece on the path of no-return

I have argued again and again for a change of policy in Portugal but those in charge in the Euro zone have achieved exactly the same result there that they have in Greece. I discussed her decline towards economic depression on Friday and on the 17th of January for those who would like the full detail.

Yesterday’s consequence was yet another day where Portuguese government bond prices fell heavily and yields surged. This was particularly noticeable on a day when in general government bonds were rising in price. Her ten-year bond yield went to the 17% level where it is again this morning after a brief foray above 18%. Her three-year bond yield went above 24%. As you read those numbers please remember that she is supposed to be in a rescue programme and that she is backed by other Euro zone governments and the IMF and yet those prices and yields yell fears of default at you. Also those who read my update on the European Central Bank have yet more losses to consider on its bond-buying programme.

In terms of actual cost to Portugal then we need to look forwards as she is supposed to return to bond markets next year. At anything like these levels she would immediately look and indeed be insolvent. So there is something that last nights summit did not address as Portugal will need more bail out money just like Greece. So of the three countries in receipt of bail out money two will definitely need more which means on this occasion that I have to disagree with Meatloaf’s assertion.

Now dont be sad
Cause two out of three ain’t bad

On this occassion it is both sad and bad. But I wish now to focus minds on the future as we face a future of other countries (Spain, Italy….) hitting problems and facing a similar flawed rescue plan which fails. Are investors getting ready for this?

Never believe anything until it is officially denied

When asked yesterday if there was any risk of a debt haircut for Portuguese government bonds her Prime Minister Pedro Coelho replied:

No, there is not

Possible Currency Flight

If funds are fleeing the Euro then the logical place to look for signs of strength are my two “currency twins” the Japanese Yen and the Swiss Franc. These have been the strongest two main currencies in recent times giving them a reputation of being safe havens in these troubled times.

The Yen surges

We have seen a long rally in the Yen since its recent low back on the 8th of April last year at 122.8 which at its extreme pushed it below 100 versus the Euro. There had been a recovery back above 100 for the Euro but it has fallen over the last 2 trading days from 101.98 to 100.53.

Such was the strength of the Japanese Yen yesterday that it even made strong gains against a generally firm US dollar and is now at 76.22 against it. Much more of these two trends and we may see the Bank of Japan intervening again to try to weaken the Yen. However supporters of what has become called Yentervention would do well to muse on the fact that we are now at a level against the US dollar where the world’s main central banks all intervened it last March after the tsunami. If we look at its exchange rate against the Euro then the lowest European Central Bank fixing during that period was 110.42 so we can see that the Yen has risen substantially since then.

So late nights right now will be de rigeur at the Bank of Japan although Japanese politicians usually like to employ plenty of rhetoric first with phrases like “strong action” to the fore. The fact that this rhetoric has never to my knowledge worked does not seem to trouble them and accordingly strong action is an oxymoron for my new financial lexicon.

But returning to today’s theme the picture above is troubling as it is showing signs that  not only there may well have been currency flight from the Euro  zone over a sustained period but that the last couple of days have seen it return.

The Swiss Franc

It was only on the 23rd of this month that I discussed the dangers of a further rally in the Swiss Franc when it was at around 1.206 versus the Euro. Yesterday it advanced to 1.2039 at its peak. Why am I discussing such a small move? Because the Swiss National Bank promised us “unlimited intervention” at 1.20. If we skip the obvious hype and bombast implied in such a statement we arrive at how the SNB will defend this level. Accordingly it may well intervene in small amounts earlier than 1.20. And investors may buy the Euro and sell the Swiss Franc here knowing that they have a back stop, for now anyway.

So as I explained above movements at this level are much more significant than they may at first seem. But just like the Bank of Japan, the Swiss National Bank will be on amber alert and be very near to red alert. We may see a sort of dance for a while as markets tempt it and of course we may see phases where the Euro strengthens and helps the SNB out. But recently Euro strength against other currencies has not been repeated against the Swiss Franc. If we hang around here then human nature being what it is……

If we move from price to quantity and if you like move to a more Japanese system then there is a further danger. If someone out there wants to move a large sum of money from the Euro to the Swiss Franc then they may find that central bank intervention gives them a chance to do that so that the current seeming stability is misleading. The best analogy here is a dam burst which looks untroubled until the moment it happens.

Two-speed Euro zone?

Today we saw that the unemployment in the Euro zone rose to 10.4% which is a record in the Euro era. Meanwhile the unemployment rate in Germany fell to 6.7%.

Greece has a one-year government bond yield of 454%. Germany has a one-year government bond yield of 0.09%.

From Greece’s statistics office today

The retail trade volume index, including automotive fuel, decreased by 8.9% in November 2011 compared with November 2010. The Index in November 2010 recorded a decrease of 11.6% compared with November 2009.

Why would anyone want to flee a currency zone like that?

Institutionalised inflation in the UK

One of my themes has been that the UK suffers from institutionalised inflation where official and semi-official bodies find it easy to raise prices. Step forward today the water industry where the (ineffective but expensive) regulator Ofwat states this.

The regulator said that the average rise was made up of November’s retail prices index of 5.2%, plus 0.5%.

Yet only last night there was a reply on a past post on this blog telling me that the UK does not have an inflation problem. Will he or she pay our water bills for us?


This entry was posted in Euro zone Crisis, General Economics, Greek Financial Crisis, Japan's Economic Situation, Quantitative Easing and Extraordinary Monetary Measures, UK Inflation Prospects and Issues. Bookmark the permalink.
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  • Andy Zarse

    Shaun, I think CNBC Squawkbox have picked up on your musical theme. They showed the usual chart quoting the eurozone bond yields, but today they changed the background music to Jackson Browne’s “Running on Empty” :-)

    Whatever the context it’s a great tune anyway and it put me in a good mood. I love Squawkbox, they are wags!

  • Anonymous

    Hi Shaun
    I can see that academics and the IMF are hard at work creating fiscal devaluation for straight-jacketed currency union members as an alternative to exchange rate devaluation. Something like : increase import tariffs and export subsidies / increase VAT and reduce payroll taxes then add a sprinkling of sovereign debt haircut. Hey presto – renewed competiveness and growth and a quicker return to sovereign debt markets. WHat’s all the fuss about, Shaun?

  • Ian_jones

    More QE on the way so more inflation on the way, sadly not for wages so debt to income ratios do not change just more need to drive down interest rates. When the debt markets realise the yield doesnt cover the risk the bubble will burst. Still, the banks will be ok.

  • Kostas Kalevras

    Portugal was hit a lot by the debt downgrades which threw her debt rating to junk (which has a result of removing its bonds from certain bond indexes). The most immediate and big problem of the increasing yields is with its bank sector. Each time bond prices drop, banks need to post more collateral in their repo agreements in private markets and with the ECB (as long as they are using government bonds for collateral, which is what most refinancing is based on).
    I would not be surprised if Portugal’s central bank started ELA with domestic banks sooner or later.

  • JW

    Well the ‘Mish’ blog has started putting video links to its musical references. Need to up your game Shaun!

  • Andy Zarse

    Here you go, running on empty…

  • Anonymous

    Shaun I thought you would be interested in the Euro-isation of Croatia. Apartment/houses are priced in €/square meter; private deposits stood at €20 billion at the end of 2011; banks are offering 3.5% interest on Euro deposits (up to 3 years). I ask people why the “love affair” with the Euro considering all the problems – the answer generally is that they feel it is still “safer” than the local currency. When trying to point out the potential problems most individuals prefer to adopt  the “ostrich” approach and say they think it unlikely that anything “dramatic” will happen….long live the sheep!! 

  • Anonymous

    Hi Ray

    Thank you that is interesting. It ties in with my view that if there is a “collective consciousness” for nations it is something that once it gets set on something takes a long time to change. It seems that as long as minds think something is a good idea then they stay with that for quite a long time even if circumstances change fundamentally.

  • Anonymous

    Number 4 for Emergency Liquidity Assistance? You may well be right although we are again looking at a problem in the role of the European Central Bank as if it is to be a “lender of last resort” there should be no ELA for national central banks.

  • Anonymous

    Hi Shire

    If only if only….

    The fly in that oinment is that Christine Lagarde was one of the architects of the existing failed strategy (which arrogantly ignored the need for an early debt haircut) and she now heads the IMF!

  • Anonymous

    Pinching my ideas? Oh no :)

  • Ed_Dirtz

    It is an interesting note that in the States, food  & fuel are not included in the inflation reports.  Ironically those two expenditures make up for a high percentage of a household costs per month.  Has anyone compared a box of cereal or other packaged food item to the size it was a year ago, it’s most likely smaller & more expensive to boot. Invisible inflation. 

  • Anonymous

    Hi Ed,

    There is an economist in the states who calculates an alternate inflation index called shadow stats. The idea is to expose manipulation of official statistics. Shadow stats calculates over 6% using 1990s methodology and over 10% using the 1980s methodology.

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