Week in FX Europe May 13-18

The collapse of efforts to form a Greek government this week has reinforced, for many, the bullish outlook for the big dollar. The run-up to Greek parliamentary elections on June 17 will be marked by continued concerns about a disorderly exit from monetary union. The market currently sees contagion fears making inroads with other periphery economies. Moody’s downgraded sixteen Spanish banks by one to three notches and they still have another eleven EU members to vet by next month. The market seems comfortable shorting currencies geared to euro area growth as data is consistently signaling weaker activity in Q2. Expect the latest round of financial stress to further damage business confidence with the core economies.

Below are some other highlights of the week:

EUROPE

• Market sentiment continued this week where it left off in risk aversion mode. Fears of a disorderly Greek default and EMU exit remain the main source of market stress. The negotiating of a grand coalition was unsuccessful as the country now heads towards a June election.
• GER: Chancellor Merkel’s CDU party lost more vote share in North Rhine-Westphalia, with the SPD increasing its control of that state. The sitting Chancellor looks under pressure to win next year’s election.
• EU: Mainland data continues to point to a significant deterioration across the euro-zone. EZ IP fell -0.3%, m/m, much worse than the consensus for a +0.4% rise. Not surprisingly, the weakness came from a sharp contraction in energy production after weather related strength in Q1.Analyst’s continue to point to the weak PMI’s which convey a worrying growth outlook in the euro-zone going into Q4.
• GER: German economic expectations have fallen somewhat aggressively this month after rising for five consecutive releases (10.8 vs. 23.4). It obviously reflects the shenanigans occurring in Greece and the French political results. Collectively, both situations seem to be raising doubts about the commitment from some European Governments to fight the periphery regions debt crisis.
• EU: Overall, euro-zone GDP was flat in Q1 according to the flash estimate, better than the consensus expectation for a -0.2%, q/q, contraction. German growth surprised to the upside, rising +0.5%, q/q. Positive German contributions came from domestic consumption and net trade, while investment decreased. Both Dutch and French GDP did not deviate too far from flat. However, in the periphery, the news was less good. The Italian economy appears in a deeper recession with a -0.8% contraction in Q1, while Greece was down -6.2%, y/y and the surprise was Portugal’s GDP falling only -0.1%, q/q. The market seems to believe that the weak peripheral should trump the better news in the core in terms of EUR impact. Will the ECB set policy to maintain peripheral stability?
• GER: Despite being government less, Greece paid the +€430m international bond maturing this week, hoping obviously not to aggravate sentiment given current delicate conditions and be seen as a new trigger for systemic pressures.
• CE3: Their economies reported very weak GDP numbers. CZK GDP contracted -1.0%, q/q, after the country entered a technical recession in the past quarter. This should support the doves thinking. Elsewhere, HUF’s GDP contracted -1.3%, q/q, much worse than the expectations for -0.5%qoq. Expect renewed concerns in mainland Europe and weak growth outlooks to affect the CE3 further.
• GRD: Greek political leaders fail to build a coalition. A caretaker government will oversee next month’s election.
• EU: Merkel and new French President Hollande indicate that they would consider measures to spur economic growth in Greece, as long as voters there commit to the austerity demanded for Greece to stay in the euro.
• GBP: The tone of the BoE latest inflation report was very dovish relative to the hawkish set of minutes. Based on market interest rates and current size of asset purchases, inflation is projected to be below the +2% target at the end of the forecast horizon. Governor King indicated that the will respond if the euro crisis escalates. Are more AP’s on the horizon? Will sterling outperform the EUR and other growth sensitive currencies as a safe haven?
• UK: Jobless claims fell -13.7k last month, while March jobless claims were revised to -5.4k from +3.6k previously. These are first falls in job claims in over a year. The ILO unemployment rate fell to +8.2% for Q1 vs. +8.4%. Since Q4, the UK economy has managed to create +165k jobs. Is the UK economy in that much of a technical recession?
• EU: Euro-zone inflation was +2.6%, y/y, in April, unrevised from the preliminary estimate and slightly down from +2.7% in March. Core-inflation was stable at +1.6%, y/y.
• EU: The ECB announced that they will not lend any more to several Greek banks until their recapitalization is complete, combined with the announcement of new Greek elections for 17 June, happen to offset the overall positive outcome of Spain’s mid-week bond auctions. Spain issued €2.5b to reasonably strong demand.
• GR: Anagiotis Pikrammenos, the head of Greece’s Council of State, will head the caretaker government into next month’s elections.
• EU: Moody’s downgraded Spanish banks on rising loan defaults, a renewed recession, restricted funding access and the reduced ability of the government to support lenders.
• ITL: Following large falls in the previous two months, Italian industrial orders rose +3.5%, m/m, in March, handily beating market expectations.

AMERICAS Week in FX

ASIA Week in FX

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