Week in FX: Europe October 16-21

European finance ministers are meeting today and have already said not to expect anything substantive; it has most likely been pushed off until Wednesday. Then that probably will be pushed off until the summit of November 3-4. Europe has six days to get their act together. There is no dress rehearsal. It’s a live performance with all of capital markets watching. The room for error is very tight. It’s a tired, jaded and whiplashed market that’s trying to keep relative risk close to home.

While progress may be made this weekend on bank recapitalization plans and on agreeing to disburse the next tranche for Greece, the harder decisions on enhancing the EFSF seem unlikely to be reached until the follow up summit.

It’s not Halloween, but Troika headline are spooking this Friday market. In a sustainability report supposedly released today states that the situation in Greece has taken a turn for the worse. Greece needs +60% discounts for+110% debt/GDP and that deeper private sector involvement is vital. Greek debt is to remain high through 2030.

Below are some other highlights of the week:

EUROPE

• EU summit remains the key deadline of the week. Constructive statements by European officials last week had fueled expectations that the summit could produce a comprehensive plan. German Finance Minster Schauble killed the comprehensive fantasy on Monday.
• Wolfgang Schauble insists that EU policy makers will not present the ‘final’ solution for the EUR debt crisis on Sunday. It seems that the market will be getting the ‘key principles’ of a second bailout for Greece, but the technical details will not be for weeks later. Capital Market now has to endure a second summit on October 26.
• EU: Negative rhetoric continues to promote defensive positions against policy risks heading into this weekend’s summit climax.
• UK CPI inflation rose to +5.2%, y/y last month from +4.5% and much stronger than market consensus of +4.9%. The uptick was due in part to higher food and energy prices. Market does not expect this inflation print to have much effect on the MPC’s decision given their preemptive spike rhetoric (+5%) and QE2 announcements. Expect the market to become weary of the resilience of core-inflation, making some members less willing to ease further in the 2012.
• NOK: Norges Bank’s Q3 Survey of Bank Lending showed somewhat tighter credit standards for enterprises. Credit demand increased in Q3 and is expected to remain unchanged in Q4, while corporate credit demand is expected to be lower. This would suggest that the Central Bank could remain on hold for several more months at least, despite FI pricing in close to a -50bp cut in their policy over the next year.
• GER: ZEW survey fell further in October to a new post-crisis low (eight consecutive decline). Economic sentiment fell to -48.3 from -43.3, below the -45 expected. Not helping, the current situation assessment decreased to 38.4 from 43.6.
• News sources all week ran with the story that that an insurance scheme is the primary option being studied now in Euroland, officials have said the size might be smaller than suggested.
• FT: Reported that a permanent ban on naked sovereign CDS is to be imposed across the EU. Will this promote more FX dealings as a hedging vehicle for cross asset investment managers?
• UK: October MPC minutes showed a 9-0 vote to resume AP GBP75b. “There were clear arguments for acting quickly and decisively now that the need for further monetary stimulus had become clear”. It also emphasized that the size of the asset purchase program “could be adjusted if there were evidence that its marginal effects were different from experience suggested”. This would suggest that the BoE could easily extend the funding. There was no discussion of inflationary risks affect value of currency.
• UK: Governor King indicated that he may not be resistant to further weakness in sterling. He said that exchange rates are “the natural safety valve”.
• Reuters: Reported details from a draft guideline on EFSF implementation. Indicated the facility will be able to buy bonds on the secondary market upon approval of the ECB and Eurogroup finance ministers and then sell, hold or repo the bonds at its discretion. Market continues to be swayed by EURO rhetoric.
• UK: UK retail sales data was mixed. September sales ex-autos rose +0.7%, m/m, well above a forecasted +0.2% rise. With downward revisions to previous months, the annual growth in retails sales remained weak at +0.4%, y/y, below the +0.6% expected and coupled with the dovish BoE minutes suggest that the MPC would not be opposed to extending their QE program
• CHF: September trade surplus improved (CHF+0.8b to +1.8b). Exports rallied +3.4%, m/m, vs. – 7% decline in August. The SNB would probably require growth and inflation to deteriorate significantly before considering additional easing and FX policies.
• TRY: TCMB left its repo rate unchanged, Analysts note the corridor was widened by hiking the overnight lending rate. Policy makers stated that they are ready to take “necessary action” against lira depreciation.
• EU: German Ifo fell further this month. The expectations component decreased to 97 from 97.9, while the headline fell to 106.4 from 107.4, a touch above the 106.2 expected. Ifo expectations continue to point to a sharp slowdown.
• CHF: Swiss M3 growth rate reached a multi-year high of +8.2%, y/y in September, largely driven by a sharp rise in sight deposits in Switzerland’s banking system.

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