Week in FX Europe 8-13 July

Without either monetary or political development that can meaningfully compress sovereign spreads the odds are tipped for the EUR to retest sub 1.21 again. Peripheral markets are tighter in what optically looks like short covering. ‘Real money’ is reported to be buying the belly of the Spanish and Italian yield curve. Is it sustainable? A stuttering China and ongoing euro-zone concerns continue to keep investors at bay. The lack of urgency again shown by Euro-zone ministers to right the ship is more market negative than positive. The directional uncertainty is forcing more investors to the sidelines. Because these investors are record short EUR’s, paring positions currently requires bidding up the single unit and potentially squeezing out some much weaker short positions along the way.

Below are some other highlights of the week:

EUROPE

• EUR: The single currency started the week trading new year lows before recovering in the European trade where it again ran into offers after Spanish bonds yields continued to flirt with +7% and Italian 10-year yields held above +6%.
• EU: Markets remain focused on financing conditions in Spain as the Euro group finance ministers met and discussed the bailout program for Spanish banks, trying to add details to the broad agreement reached by leaders in June.
• ESP: The major question was how ESM would become the vehicle for directly bailing out Spanish banks once a Euro area bank supervisor was in place. Last week some euro officials indicated that the Spanish sovereign would continue to be responsible for protecting the ESM on losses. The EU Commission has clearly refuted this. Clarification on the ESMs role is required otherwise the market is likely to continue to view the direct involvement of the ESM as a “very limited benefit for relieving systemic pressures.”
• FRF: French business confidence as to be expected fell further this week, dropping from 92 to 91, its lowest point in three-years.
• ECB: Last week’s cut has moved rate differentials against the EUR, limiting scope for recovery even if systemic stress abates. This market continues to feel comfortable squeezing risk positions.
• EU: Euro-zone finance ministers agreed to disburse an initial tranche of +€30b in aid to Spain by the end of July. The aid will end being funneled through direct bank recapitalization once a new euro area banking supervisor is in place (2013). This should remove the burden of additional debt from Spain’s sovereign balance sheet. Policy makers have also extended the deadline for the correction of the excessive deficit in Spain by 12-months to 2014. Final approval of the rescue deal is expected on 20 July.
• GBP: UK manufacturing production surprised stronger than expected rising +1.2%, m/m, in May compared to expectations for -0.1% print. The IP print is at odds with PMI, gaining +1.0% on the month.
• EUR: IP reporting for the euro-zone was mixed this week. Italian production rose +0.8%, m/m, following a -2.0% drop in April. France was weak, falling -1.9%, and reversed the +1.4% gain in the previous month. SEK IP grew +3.5%, bouncing back from the weak readings in the previous three months.
• NOK: Norway’s inflation was stable at +0.5%, y/y, well below consensus for +0.8% print. The underlying inflation fell to +1.2%, y/y, from +1.4%. The subdued inflation has dealers pricing in rate cuts, however, analysts will argue that upbeat investment revenues from oil prices as well as strong credit growth could allow Norges Bank to remain on hold.
• GBP: UK’s British retail consortium “like-for-like sales” were up +1.4%, y/y, in June, compared with +1.3% in April. Separately, RICS survey showed the house price balance turned more negative, dropping to -22 in June, compared with revised figure of -17 in May.
• ESP: Spain announced more austerity measures totaling +EUR65b through to the end of 2014 in an effort to meet new budget targets agreed with its euro partners. The savings come from the usual sources. The measures include a hike in the country’s VAT rate, a cut in jobless benefits and state salary cuts.
• GER: The German constitutional court has indicated it may not communicate its decision on ESM constitutionality until late summer.
• EUR: The single currency continues to trade on the nervous side as markets overlooked policy easing in Japan, Korea and Brazil this week. World is now fixated on lack of growth.
• EUR: Euro area IP rose +0.6%, m/m. Germany continues to remain the key supporter, but the periphery grew as well with production up in Spain, Italy, Portugal and Greece.
• SEK: Swedish inflation was stable at +1.0%, y/y, in line with expectations. Underlying inflation at +0.9%, y/y, was a touch lower than consensus for +1.0%.
• EUR: Those who understand interest earn it; those who don’t pay it, does not add up anymore. The latest craze is negative two-year rates. Following the German lead the Dutch and Finnish have also fallen below zero.
• ITL: Moody’s again has cut its rating on the euro zone’s third-largest economy, Italy, to just two notches above junk status, Baa2. This pushed domestic yields higher, despite this the Italian treasury managed to offload +EUR5.25b of 10’s at +5.82% with a cover of 1.7 vs. 1.3.
• GBP: The BoE announced details of the funding for lending scheme. The scheme will run until January 2014 with loans lasting up to four-years. Banks will be able to swap up to 5% of their existing loan book to the non-financial sector and any increase for T-bills with the BoE.
• GBP: Non-seasonally adjusted data saw UK construction output fall -6.3%, y/y, in May.

ASIA Week in FX

AMERICAS Week in FX

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