Week in FX Europe April 22-27

Investors will continue to view this as a EUR relief rally without teeth unless resistance is firmly broken or the slew of weak PMI’s right themselves. The markets current low level of risk appetite is partially due to the lack of a core market trend. The availability of limited carry amongst G10 currencies is not providing enough compensation to want to embrace it. Even Central Banks absence of market hand holding is dissuading investors from strapping on more of it. Do not forget the data, regionally it has softened, and despite a good US earnings season, the lack of market volatility indicates many investors have been sidelined. Asia on the other hand has less of an “homogenous” economic cycle and analysts believe this reason alone will lead to the growing divergence of currency performance in their favor. However, until the lack of market conviction attitude changes, the market is in danger of just plodding along similar to the last couple of weeks.

Below are some other highlights of the week:

EUROPE

• The Euro-zone again was the catalyst of risk off price action beginning the week, as weaker than expected data, combined with political uncertainty and ECB resistance to additional stimulus caused risky assets to sell off aggressively. The EUR growth proxy currencies, like the HUF and PLN, bore the brunt of market pressure.
• EU: Euro-zone flash PMI data moved sharply below 50 this month. Manufacturing PMI fell to 46.0 from 47.7, below consensus for 48.1. Individual countries like Germany and France provided no market relief. The German PMI was down to 46.3 from 48.4, while French PMI rose to 47.3 from 46.7 in March, but remained still well below 50. EZ services PMI fell to 47.9 from 49.2 with the lack of support again coming from Germany and specifically France. EZ PMI will eventually rub off on CE3 and the Skandis.
• EU: ECB continues to resist IMF and US treasury call for additional monetary stimulus. Euro policy makers have argued that that the ECB has done enough by cutting interest rates and issuing more long-term bank loans. “None of the advice that the IMF is offering has been discussed by the Governing Council, in recent times at least”.
• FRF: Mr. Hollande won the 1st round of French presidential elections, taking +28.6% of the vote to Mr. Sarkozy’s +27.1%. The two candidates will go head to head in a second-round of voting on May 6. The market fear is that if Hollande is elected, he will call for the renegotiation of the European treaty on fiscal discipline. Optics tells us that France to date has been a major player in devising a solution to the Euro debt crisis, so any signs of instability and we have the makings of an event risk excuse. In the Netherlands, with the budget talks collapsing should put the countries triple-A credit rate at risk.
• EU: Results from last weekend’s G20/IMF and World Bank meet saw the G20 pledged \$430b to boost the IMF funds. The US declined to contribute while Canada proposed making it harder for Europe to tap aid.
• CZK: The Czech government dissolved itself over the weekend and it is unclear whether it can gain majority support in a new coalition with a smaller split away party. The currency is encounter further pressure in the short term
• EUR: Mid-week, decent Dutch (1.9b 2’s), Spanish (1.93b Bills) and Italian (2.5b Bond) auctions results temporarily trumped growth and political instability worries. Obviously the most significant issue was the Dutch as it was taken down just after a divided political weekend.
• HUF: Hungarian CBank kept benchmark rate on hold at +7%. An IMF/EU deal is likely to allow cuts to the o/n rate. HUF has been a better performer this week on confirmation that agreement with the EU will allow aid talks to move forward.
• GBP: UK GDP contracted -0.2%, q/q in Q1, putting the UK in a “technical” recession. The weakness came primarily in erratic industries and ex-these industries, GDP grew +0.1%, still a weak pace. The BoE has expected a weak print and has vocal in highlighting that leading indicators have been picking up. A percentage of the market expects the BoE to see through this print and is unlikely to head towards more QE.
• EU: The ECB bank lending survey revealed that demand for credit has continued to fall sharply (equates to contracting activity data in Q1) and that there has been a significant decline in the net tightening of banks’ credit standards. However, banks believe that demand for future credit coupled with easing credit standards should be supportive of a ‘modest’ recovery in H2. Obviously all of this relies on the performances of the peripheries.
• EUR: EU business confidence data showed further deterioration. Industrial sentiment fell to -9 from -7.1 (a new 13-month low). Consumer confidence held up better, but the data should support ECB easing expectations, and leaves the European periphery currencies like the Krona (+1.63%) and Zloty (4.5%) vulnerable.
• ESP: Spain’s sovereign credit rating was cut two notches to BBB+ by S&P this week. They cited concern that the nation “will have to provide further fiscal support to the banking sector as the economy contracts.” The market already had this priced in.
• ITL: Italy came to the market on Friday. After a Spanish downgrade, Italian benchmark yields climbed to +5.84%, 60bp above a comparable bond sale in March. Persistent high yields will only add to markets’ concerns about the debt of weaker EZ countries. Despite this, the Italians did sell +5.95b euros bonds, near the top of a planned issue range of between +3.75b and +6.25b euros. The EUR took the sale in its stride.
• CHF: Swiss KOF survey headline improved to 0.4 from 0.09 and was the highest reading in five-months. However, they levels remain consistent with poor quarterly growth.
• SNB: The CBank President Jordan indicated that the SNB has no intention of introducing negative interest rates. Analysts note that this goes some ways in supporting market expectations that the EURCHF floor could be raised if data begins to disappoint again.
• Skandis: Norway reported strong March retail sales, up +2.4%, m/m, after a +1.1% rise in February. Swedish retail sales were also better than expected, but their exports were weak. Of the two currencies, SEK is perhaps more vulnerable to a Euro area growth fears.

AMERICAS Week in FX

ASIA Week in FX

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