Week in FX Europe Mar 25-30

The latest Euro monetary data continue to show that the ECB’s policy measures eased much of the distress in the financial system. For the time being it seems that deposit flight from the peripheries has eased. But although policy has prevented disorderly and chaotic deleveraging of the financial system, it has not stopped bank deleveraging completely. Overall, it has been a good week for European currencies as all have posted solid gains against the dollar. They have been supported by surprisingly stronger European data, especially after the very weak PMIs the previous week. US on the other hand have generally disappointed the market this week. Investors are beginning to brace themselves for a weak China PMI this weekend. A slew of upcoming global PMI’s, especially from the Euro peripheries could leave the single unit vulnerable in the short term. With growth remaining a concern for the region should keep the ECB dovish and rate differentials trending against the EUR.

Below are some other highlights of the week:

EUROPE

• EUR: After the Middle-east sellers were done dragging the single currency to the Monday overnight lows (1.3190), German data and a dovish Bernanke rejuvenated the EUR, allowing the currency to consider squeezing some of the record market shorts out of their positions.
• EUR: German ifo index for March came in better than expected at 109.8. It was the fifth consecutive increase, and on the face of it, points to a modest increase in activity. However, “The near term risks remain skewed to the downside as oil prices might weigh on business profits and external demand remains sluggish, especially from other main euro-zone countries that suffer from a technical recession.” That being said, the Ifo release provides some relief after the weak PMI last week. The largest gain in the survey came from retail, while manufacturing decreased a touch.
• EU: Apparently, Germany is reportedly ready to allow a temporary increase in the overall euro-zone bailout fund. European finance ministers meet today in Copenhagen to discuss the expansion of the ‘institutional firewall.’ Rather than endorsing a permanent expansion, Germany is supposedly allowing the EFSF to run in parallel with the ESM. This option would temporarily expand the rescue system’s firepower to €940b until mid-2013, when the EFSF is set to expire.
• IRL: Ireland is expected to set a date in May or early June for its referendum on the euro zone fiscal compact.
• ESP: Spain’s governing center-right Popular party failed last weekend to win control of the important southern region of Andalusia from the Socialists in a regional election.
• Fed: The European markets interpreted Bernanke’s comments as meaning that the Fed will keep interest rates low until 2014 at the minimum and that there will be more accommodative measures if unemployment does not improve rapidly.
• FRF: French consumer sentiment rose sharply and unexpectedly (87 vs. 82) in March to a level not seen in twelve-month. Rising consumer confidence is always good news. However, prospects for future spending remain relatively weak the world over, as purchasing powers remain undermined by uncertainties about future activity and weak labor markets.
• ESP: Both the Spanish and Italian debt auctions were themselves well received, and managed to push yields lower, temporarily at least. Is it only a matter of time that the ‘band aid for a bullet wound’ starts to bleed again? Spain is very much in the capital markets firing line and the natural contagion reaction would suggest that Italy in only steps behind. The vulnerability of the peripheral economies remains a significant constraint on ECB policy and could compel more policy easing, keeping rate differentials moving against the single unit.
• HUF: The central bank of Hungary (MNB) is introducing a two-year, collateralized, base rate indexed loan facility to be operated each month from the beginning of April. The MNB also outlines details of the eligibility for the collaterals, and the changes will take effect later in the month. The new credit facilities aim to strengthen Hungarian banks’ balance sheets, and increase lending to the corporate and household sectors.
• EUR: Euro-zone money growth surprised stronger than expected at +2.8%, y/y, vs. +2.5% in January. The strength seems to have been driven by bank purchases of government debt. Bank lending to the private sector fell -0.1%, m/m, after a +0.4% rise the previous month, while banks’ holdings of government debt increased by +EUR36b with particularly strong buying from Italian and Spanish banks.
• GRE: The deposit flight from the EU periphery appears to have come to an end, except for Greece where deposits fell -1.9%, m/m, after a -1.8% drop in January. Have the ECB’s liquidity operations been successful in containing the peripheral debt crisis? It still has issues promoting credit to the “real economy” and it’s this that should remain a concern for the ECB. Expect FI dealers to price more easing as peripheral data flow remains weak in the weeks ahead.
• ITL: Italian business confidence rose to 92.1 in March from 91.7, above consensus for 91.5. The data add to the list of better-than-feared releases in Europe following the weak PMI reports last week. However, the level of the index remains historically low.
• SEK: Swedish manufacturing confidence rose sharply to 1, well above the consensus forecast for -11. It’s worth knowing that this series lags the manufacturing PMI (released next week).
• GBP: UK GDP growth in Q4 was revised lower to -0.3%, q/q, from -0.2%. Their current account printed in line with expectations, recovering to -£8.5b from -£10.5b in Q3.
• EUR: Euro-zone confidence surveys were mixed. Consumer confidence edged slightly higher this month and services were broadly flat. However, industrial confidence dropped to -7.2 from -5.7, confirming the softness in the flash manufacturing PMIs for March.
• GER: German unemployment rate fell to a new record low of +6.7%, y/y from +6.8% previously. Again this highlights “the rising divergence in economic performance between the Euro area core and periphery, likely to result in a steadily dovish ECB”.
• SEK: Swedish retail sales jumped +1.2%, m/m, and in line with the better than expected consumer and manufacturing confidence data this week. Riksbank meeting to be very data dependent, with a cut still an option after the surprise ease by the Norges Bank.
• GBP: Foreigners sold £4.7b of gilts in February following net purchases of £9.4b in January. With a QE program extension now less likely should improve foreign demand for government securities, keeping sterling supported against the EUR over the near term.
• EU: Two day ECONFIN meetings begin in Copenhagen.
• EU: President Juncker has indicate the finance ministers have agreed on the size of the firewall programs at the first day of ECONFIN meeting. The firewall will be €700b, implying the EFSF will continue to run parallel for a period to accommodate the portion of the fund that has already been committed and provide additional coverage while the ESM’s capital is being amassed. This should allow limited contagion risk from Portugal; however, Spain and Italy are now in the crosshairs to watch for evidence of renewed systemic stress.
• EUR: The single currency must depreciate according to Roubini to spur growth in the EU periphery.
• ESP: Spain is cutting -EUR27b euros from its budget this year as part of one of the toughest austerity drives in its history.
• CHF: Swiss Kof improved to 0.08 in March, up from -0.11 previously and better than consensus for 0.07 and suggests that Swiss leading indicators are likely to see a pick up. This should result in little changes for SNB policy.
• EUR: Euro-zone inflation surprised slightly higher than expectations. The flash estimate for March shows headline inflation falling to +2.6%, y/y, from +2.7% previously, above consensus for +2.5%. However, underlying inflationary pressure is to remain subdued given the lower outlook for growth, allowing the ECB to promote their dovish stance.
• NOK: Norway’s manufacturing PMI surprised with another very strong print, rising from 56.9 to 59.7 (highest print in five-years) and well above PMI levels elsewhere in G10 and EM. The headline reading is deceptive as the employment component jumped from 48.8 to 60.9.
• NOK: Retail sales were up +1.1%, m/m, well above expectations for -0.2% loss. Norges Bank announced it will purchase an equivalent of NOK350m of foreign exchange per day in April on behalf of the Government Pension Fund, unchanged from the level of purchases in the past three months.

AMERICAS Week in FX

ASIA Week in FX

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