Week in FX Europe April 29-May 4

The ECB stuck to its preceding template and ‘no’ concessions were made despite the more dire regional PMI’s. The language and copy remained very much unchanged from the previous press statement repeating the phrase that the economic outlook continues to be subject to downside risks. The only reference to the mixed data was that instead of stating “that survey indicators had broadly stabilized at low levels,” rhetoric that was heard last month, this time policy makers stated that latest survey indicators highlight “prevailing uncertainty.”

Lower rates are a distinct possibility, but for now, the ‘doves’ are disappointed. However, the downside risk to growth rhetoric keeps the rate cut window firmly open in the short term. This week’s weaker PMIs need to be supported by ‘a consistent batch of hard data’ heading deeper underwater for something to budge. Draghi is already leaning on next month for more data for policy maker’s assessment. The market expects weaker economic releases coupled with market volatility over the peripheries to force the ECB to cut the policy rate sooner rather than later. Short term, the growth outlook is fundamentally only going one way and that is not up!

Below are some other highlights of the week:

EUROPE

• EU: Trading started the week thinned by market holidays and is ending in similar fashion.
• EU: Euro-zone area M3 rallied +0.6%, m/m, in March for a +7.6% annualized rise in Q1, up from -3.2% in Q4. This would suggest that the LTRO operations have succeeded in stabilizing broader money supply. Digging deeper, the bank lending component remains weak, with loans easing off a tad. However, deposit data is beginning to show signs of stabilization in the periphery other than in Portugal. All said and done, the market continues to anticipate “further easing in the months ahead to support growth in the peripheral economies.”
• ESP: It’s not a surprise to see that Spain’s Q1 GDP being reported down -0.3%, q/q. Confirming two consecutive quarters of contraction, the country is now in a technical recession, just like the UK.
• SNB: Reported its reserve breakdown and the eye openers was the GBP increase. It rose from a Q4 +4.2% level to Q1’s +8.5%. The SNB stated that it is “simply moving back to pre-intervention allocations.”
• NOK: The Norges Bank (Central Bank of Norway) reported that it will buy +NOK350m of FX per day for the government pension fund (same as last quarter). Analysts note that this level of FX buying is moderate relative to the past few years and should only represent a modest drag on the domestic currency.
• GBP: UK manufacturing PMI came in weaker than expected, dropping to 50.5 from 51.9 and reversed the Q1 improvement.
• TRY: S&P revised its outlook on Turkey to stable from positive, mostly on the back of “less-buoyant external demand and worsening terms of trade.”
• EUR: A weak European PMI continues to weigh on sentiment and the single currency. EU PMI was revised lower to 45.9 from 46.0 last month. The once mighty core looks weak, with manufacturing PMIs at 46.2 and 46.9 in Germany and France respectively. The periphery fared even worse, with a 4 point drop in Italy and poor readings in Spain, Greece and Ireland. Overall perception would suggest “a very difficult growth outlook.”
• CHF: Swiss PMI fell sharply to 46.9 from 51.1 previously. “Growth risk is likely to intensify deflationary pressure,” and keep the SNB’s commitment to the 1.20 floor intact.
• CE3: No region tied to mainland Euro has been left unaffected. The CE3’s fell in line with the EZ data.
• UK: Money data was slightly stronger than expected. Mortgage approvals increased +49.9k, above consensus for +48.0k. Meanwhile, the BoE data showed that foreigners were net sellers of gilts in March (£1.7b vs. sales of £4.7b in February). Expect ongoing Euro regional stress to continue to provide a demand for Gilts.
• EU: Spain issued 3 and 5-year bonds this week in a reasonably successful auction, with the +EUR2.52b sale slightly exceeding the target range. France also saw good demand for their product, selling +EUR7.4b in long-term debt, also at the top of the targeted range.
• GBP: UK ‘services’ PMI surprised lower than expected, falling to 53.3 from 55.3 and below consensus for 54.1. While still in expansion territory, the print is probably not low enough to sway the MPC in favor of more QE.
• ECB: Did the weak PMI’s convince the need for an easing bias? Not entirely. Policy makers stuck to their guns, giving no concessions and left the language very much unchanged from the previous press statement. By not discussing a rate cut helped push front-end yields higher. Many expect weaker data coupled with market volatility over Spain will force the ECB to cut the policy rate sooner rather than later. Short term, the growth outlook is fundamentally only going one way and that down!
• Peripheries: Spanish and Italian services sector contracted further last month and is causing “anxiety about the state of the Euro-zones economy.”
• ESP: The final PMI reading confirms that the Spanish services sector has managed to contract for the tenth-straight month. The decline comes hot on the heels on data earlier this week confirming that the country has technically reentered a recession in Q1.
• ITL: The Italians are no better, their services PMI index fell to its lowest level in three-years. Both economies are suffering from a ‘marked cyclical slowdown’ and it is only natural to believe that tighter fiscal conditions add further pressure on domestic demand. This will eventually translate into further deterioration in Q2.
• FRF: The EUR bears are backing a Holland win in the French second round this Sunday, resulting in investor concerns about the ability of Euro-zone officials implementing the agreed upon fiscal measures having an impact on a timely basis.
• NOK: Norway dumps Irish and Portuguese Bonds from its Government Pension Fund Global.
• TRY: Turkish inflation rose to +11.1%, y/y from +10.4%.

AMERICAS Week in FX

ASIA Week in FX

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