Week in FX Europe Aug 5-10 2012

The EUR’s lackluster performance this week, especially after printing a five-week high (1.2444), paints a picture of uncertainty for the single currency as expected follow through gains have failed to develop. Not helping the single currency’s performance has been the Euro holiday season and the markets lack of liquidity. Investor apathy and lack of CBank follow through again had the EUR testing some key support levels this week. It’s very possible that the US yield advantage could pressurize the single currency back to the early 1.22 stratosphere, as an outperformance of 2-year German product versus its US counterpart suggests a move back to the spread wides of the summer. A EUR break below 1.22, with conviction, would very much dampen hopes for a medium term 1.25 recovery. Technically, the momentum behind the short term bull wave, from the July 24 low at 1.2042 is clearly slowly down. It’s not a surprise with the lack of enthusiasm that the retail sector has taken profit and currently sits EUR neutral, for now at least. The market prefers to be a better seller of EUR’s on rallies.

Below are some other highlights of the week:

EUROPE

• EU: The market is going through the post payroll lull. This tired trading week kicked off with a German spokesman last weekend stating that his government backs Draghi’s measures. Rhetoric is cheap and especially so when the majority of market participants are on holidays.
• EUR: Analysts are convinced that the Capital Market is currently trapped between concerns about inadequate EMU measures to date and the knowledge that relief could arrive quickly.
• ECB and FED: Investors want and need to be led. The uncertain time frame, especially from Draghi and company, for delivering the bond market support has made it difficult to maintain short risk positions, even though the ECB failed to deliver anything of substance last week.
• GR: The troika team along with the EC, ECB and IMF members have concluded their meetings in Greece. Officials noted that the discussions on the implementation of the Greek program were productive and that there is an agreement on the need to strengthen policy efforts. They are expected to return next month to continue their discussions.
• EU: European growth data continues to struggle. Italian GDP contracted -0.7% in Q2. Analysts note that it’s the third consecutive month of contraction and the fourth consecutive quarterly decline.
• ITL: Italian IP fell -1.4% in June, while Dutch IP dropped -0.6%.
• GER: The European crutch, Germany’s factory orders fell -1.7%, more than reversing the prior month’s +0.7% rise and marking a new 2012 y/y trough of -7.8%. The data supports expectations for further monetary easing in the euro area, and should limit the EUR’s ability to rally even in an improving risk environment.
• CHF: Swiss FX reserves reached CHF +406.5b in July, up from CHF +365.1b in June. This result should ease concerns over the sustainability of the EURCHF 1.20 floor.
• CHF: CPI fell 0.7%yoy in July, a touch above consensus for 0.8%yoy.
• GBP: UK IP dropped -2.5%, m/m and manufacturing production -2.9% in June, dragged down by the Jubilee holiday. The release is expected to create a modest +0.1%, q/q positive revision to Q2 GDP. Many expect GBP to continue to outperform the EUR due to ‘safe haven’ and reserve manager flow support.
• GBP: UK’s BRC like-for-like sales were up +0.1%, y/y in July, compared with an increase of +1.4% in June.
• NOK: Norwegian June manufacturing production rose +0.8%, better than the +0.4% consensus. Regional data continues to hold up well in the face of euro area contraction, but for how much longer? Analysts are beginning to focus more on the potential vulnerability of the Euro satellite economies.
• EU: German officials have continued to make comments supportive of the ECB’s plan of action. Germany’s CDU party official Meister said the ECB plan “isn’t problematic” and that there was no rift in Germany over Bundesbank President Weidmann’s stance. For the EUR bulls, with the Spanish Prime Minister having signaled that he is reluctant to request aid, market sentiment remains vulnerable to renewed pressure on the Spanish sovereign market.
• ITL: The FT reported that Italy’s Monti remains under pressure to “renounce a bailout and instead set up a Triple A-rated private fund that would use non-strategic public assets allocated by the government as backing to issue bonds.”
• EU: Data in Europe continues to surprise on the downside, with German June IP down -0.9%. Coupled with revisions to previous months, Germanys IP is now -0.3% lower than a year ago.
• ESP: In Spain, IP contracted -6.3%, y/y, however it seems to be stabilizing somewhat following the -8.3% print in April (which was not a fool’s joke).
• FRF: France’s business sentiment indicator continues its steady decline, falling to 90 in July and thus far solidifying the worst level in three years.
• GBP: The BoE latest quarterly inflation report reaffirmed the Bank’s dovish bias. Policy makers have judged that inflation is a little more likely to be below than above the +2% target for much of the H2 (+1.6%), as the impact of external price pressures wanes and domestic cost pressures ease. The BoE has projections for growth and inflation on the assumption that rates are on hold versus market expectations for a fall to +0.2% by Q2 next year.
• EUR: European officials continue to signal that an ECB bond buying approach could happen quickly. BoF’s Noyer’s commented that the ECB should be ready to intervene very quickly and that the “operation will be enough to have an impact on the market.”
• GBP: UK goods trade deficit deteriorated to -£10.1b in June, the second worse reading on record, mostly affected by the Jubilee bank holiday.
• EUR: Friday’s Euro data was softer than expected. UK PPI input prices were up +1.3% versus expectations of +1.5%, while output prices were flat on the month. The market will build a case that investors should expect some further easing from the BoE despite been steered away from rate cuts in favor of QE. In France, IP was flat on the month versus expectation of a +0.4% gain, while both German and Italian CPI were little changed.
• GBP: UK construction output fell -4.7%, m/m in June, less than initially estimated.
• NOK: Norway’s headline inflation fell to +0.2%, y/y from +0.5% in July and below consensus.

AMERICAS Week in FX
ASIA Week in FX

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