Week in FX Europe Mar 18-23

With risk appetite stabilizing, the EUR is ending the week influenced more by month and quarter-end demands and by various option strangleholds. The single currency has managed to hold up well in the global PMI shakeout and is on the cusp of entering a new technical risk phase, shy on fundamentals and heavy on the capital rebalancing requirements. The meeting of quarter and month-end action tends to muddy the FX market. Equities and fixed-income performance this quarter is expected to see pension funds next week have a significant rebalancing requirement, especially given the size of the stock market rally and fixed income sell off. Logic and history would also mean significant month-end forex flow. Support for other asset classes can only further “muddy the waters in determining whether we have moved into a new FX paradigm whereby risk sentiment is on the up” and loosing financed by the worlds reserve currency of choice, the USD.

Below are some other highlights of the week:

EUROPE

• EUR: The single-currency started the week slowly, straddling the previous Friday’s closing prices and eyeing this week’s flash manufacturing and service PMI’s for direction.
• ITL: Italian industrial orders declined -7.4%, m/m, in January, more than offsetting the strong +5.2% rise in the previous month. The weakness was broad based, with foreign orders down -7.3% and domestic orders down -7.6%. Analysts note that the weakness in orders is consistent with a very timid recovery in peripheral economies.
• EUR: Most Sovereign yields in Europe remain moderately higher as risk aversion trading strategies dominate.
• GBP: UK CPI inflation fell further in February to +3.4%, y/y, from +3.6%, but remained above the market consensus for +3.3%. Core-inflation also moderated to +2.4%, y/y, from +2.6%, but not matching the expectations for +2.3%. The market is predicting further declines to inflation. However, crude prices remain the outlier. Any upside inflation surprises are likely to reduce fears of further QE operations. This scenario should be supportive for GBP over mainland Europe.
• UK: BoE’s Miles and Posen voted for a +£25b increase in QE according to the minutes from the March MPC meeting. The vote was split 7:2 to maintain the current program and as in February the two members preferred a larger stimulus. This reveals a continued dovish bias of the MPC. Many believe that another extension of QE is less likely.
• GBP: UK public sector net borrowing disappointed with a larger deficit of -£15.2b vs. -£8.8b in the same month last year.
• CHF: Swiss M3 supply growth slowed down in February, printing +6.4%, y/y, vs. a downwardly revised +7.3% in January. Analysts note that the decline is largely attributed to a lower growth rate in bank deposits, driving money supply and credit growth to their lowest levels since the SNB started intervening seven-months ago. Interestingly, mortgage growth continues to edge higher and reinforces the SNB’s concerns about “growing signs of imbalances” in the housing market. Dealers expect policy makers to remain accommodative unless inflation ‘undershoots its target’.
• EUR: Troika published a generally positive review of the reform process in Portugal, and indicated that Monti’s Italian administration appears to be making progress on labor market reform, and this despite opposition from one of the three-major unions. FI dealers continue to cite lack of interest in periphery product, which is allowing yields to back up.
• EUR: Risk appetite is waning after weaker global data was reported mid-week.
• EUR: Is the Euro-zone walking towards a fiscal austerity based recession? Euro-zone PMI’s surprised very weak. Manufacturing was particularly disappointing, falling to 47.7 from 49.0 and well below consensus for an improvement to 49.5. Services were a little more resilient, with the overall euro-zone print at 48.7 down from 48.8, but below expectations for 49.2. The data suggest ECB is likely to remain dovish. The fact that Europe’s backbone, Germanys own manufacturing activity slumped back into contraction in March, is weighing heavily on investor sentiment, both for the EUR’s value and regional risk appetite. Expect Spain and Portugal to be thrust to fore of ‘this’ crisis again now that Greece is no longer, temporarily at least, providing the same sort of volatility.
• GBP: UK retail sales ex-fuel fell -0.8%, m/m, in February, worse than consensus for -0.5%. The January release was also revised lower to +0.6% from +1.2%. Dealers still anticipate GBP to outperform mainland Europe.
• TRY: The Turkish Central Bank (TCMB) has tightened liquidity in response to a weaker TRY. The bank decided not to provide one-week lira funding at its policy rate of +5.75%. Hawkish Central Bank governor rhetoric suggests that policy makers are unlikely to cut the upper end of the short term interest rate corridor at next week’s meeting.
• ITL: Italian 10-year yields are ending the week up another +6bp and well-above +5% again.
• EUR: French business confidence rose to 96 in March from 92 and above consensus for 93. The positive surprise is at odds with the weak PMI print. However, analysts note that the “series tends to lag the PMIs and the strength could be more reflective of the PMI pick up in February.”
• GBP: The Nationwide consumer confidence index declined to 44 in February from 47 in January.

AMERICAS Week in FX

ASIA Week in FX

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