Week in FX Europe June 17-22

Germany’s Merkel says we must fight for the Euro. Was she referring to the Euro championship? This week has all been about Spain, both on the pitch and in banking circles. Independent audit reports presented their worst and it was better than the market was expected and has done little for risk. Bearish EUR is the market consensus for now. Despite the hopes for policy response, “investors appear to believe EUR itself is structurally impaired and least likely to benefit from the potential relief to risk appetite.” Expect many investors to be selective on risk once they are done licking their different asset class wounds. Perhaps they should be looking east, towards some EM currencies?

Below are some other highlights of the week:

EUROPE

• Gr: The Greek election produced the best possible results for the markets since pro-bailout parties conservative New Democracy and socialist Pasok together won 162 parliamentary seats (out of 300), and enough votes to form a coalition majority without the need of any anti-bailout parties like radical left Syriza. The risks of a Greek refusal of the bailout agreement and an exit from the Euro-zone are now very much reduced. EU leaders have already indicated that they are willing to relax the conditions of the bailout agreement by giving Greece more time to meet its deficit reduction targets.
• FRF: The French election results were positive for President Hollande. It gives the Socialists control of the presidency and both houses of parliament. This will make it easier for him to push through additional budget deficit-cutting measures and any EU treaty changes that become necessary.
• ESP: Spain successfully auctioned +EUR2.4b of 12-month bills with a bid to cover of 2.16. The average yield they paid was +5.074% (+210bp more than the 2.985% rate they paid on May 14). They also sold +EUR639m of 18-month debt with a bid-to-cover ratio of 4.42 times vs. 3.23 in the last auction. The yield on the 18-month debt was +5.107% compared with +3.302% last month. It was no surprise that the Spanish Treasury was able to sell the allotment as it was short-term maturity horizon.
• EUR: German June ZEW investor and analyst expectations index plunged to -16.9 from 10.8 in May, much weaker than expectations for a drop to 2.3 and the biggest drop since 1998. Meanwhile, the Eurozone June ZEW investor expectations index fell to -20.1 from -2.4 in May. The indexes indicate how badly the Greek and Spanish situations have hurt confidence among investors and institutional equity analysts.
• GBP: The UK May CPI dropped to a 2-1/2 year low of +2.8%, y/y, from +3.0% in April, but the May core-CPI rose slightly to +2.2% from +2.1% in April. The decline in headline inflation is good news for the UK, which has been constrained in providing further stimulus due to high inflation.
• IMF: They announced an increase in its resources at the G-20 meeting. China will contribute another +$43b and new contributions of +$10b each from Brazil, Mexico, India and Russia. Other countries will provide smaller capital contributions such as South Africa, Colombia, Malaysia, New Zealand, and the Philippines. The IMF has now raised funding commitments to +$456b from +$430b in May. These contributions will add to the $380 billion the IMF currently has on hand to provide backstops to troubled countries.
• EUR: Euro-zone Apr construction output fell to -5.0%, y/y, from a revised -2.6% in March.
• EU: The G20 summit got under way at the beginning of the week with the market expecting very little in terms of decisions. The EM did try and put pressure on the EU leaders to improve their management of the periphery debt problem.
• EU: The G20 communiqué mentioned support for a European banking union. This is in spite of statements from German officials that did not register any change in tone on the issue, suggesting that they remain opposed to this policy option.
• GBP: UK headline inflation fell to +2.8%, y/y, the lowest level in three years and below consensus for +3.0% print. The drop was driven mainly by lower food and energy inflation. Core-inflation rose from +2.1%, y/y, to +2.2%, but did not exceed the consensus forecast for +2.3%.
• EU: No policy innovation/commitment on Europe at G20 summit.
• GBP: The BoE minutes from the June meeting surprised very dovish. The committee voted 5:4 to keep QE program on hold (King, Miles and Posen preferred +£50b and Fisher £25b QE extension). The committee also discussed but rejected a rate cut. Expect an extension next meet. GBP is still seen as a EUR “safer-haven.”
• GBP: UK jobless claims rose +8.1k in May, much worse than the consensus for a -4.0k drop.
• Moody’s: They upgraded Turkey’s foreign currency credit rating from Ba2 to Ba1.
• SEK: Swedish domestic confidence surveys surprised weaker than expected, falling to 3.1 from 5.9, below consensus for 4.0.
• ESP: The Spanish government came, they delivered and they went. That was the Spanish +EUR2.22b short bond issues on Thursday. It was the first auction since the Spanish bank fix. The ability to offload all issues proves that Spain retains its access to capital markets. However, is it sustainable?
• EUR: The euro area flash PMIs showed some signs of stabilization this month. The manufacturing PMI fell from 45.1 to 44.8, the service headline rose marginally from 46.7 to 46.8 and the composite PMI was unchanged at 46.0. The win, the rate of declines are slowing!
• GER: German flash PMI fell further in June, but the details of the manufacturing survey were not as grim as the headlines. Output and new orders showed signs of stabilization, rising to 44.9 and 44.0, respectively.
• GBP: UK ex-retail sales (ex-fuel) grew by +0.9%, m/m in May vs. market expectation for a +0.7% increase.
• CHF: Swiss trade surplus rose from +CH1.3b in April to +CHF2.5b in May. This was driven by a +1.8%, m/m, rise in real exports. Bigger picture, on a y/y basis exports fell -3.7%.
• GER: German Ifo expectations fell sharply to 97.3 from 100.8 last month, below consensus expectations for 99.8. The 3.5 drop points to rapidly deteriorating confidence among German businesses. Results are back to 2011 trough.
• ESP: Spanish independent auditors’ report indicated a capital need of +€62b, better than the market expected, but still likely to require substantial EFSF/ESM aid. Spain is expected to formally ask for aid today.
• EUR: Monti said that Italy, Germany, France and Spain would offer a growth package worth +1% of GDP at next week’s EU Summit.

AMERICAS Week in FX

ASIA Week in FX

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