Week in FX: Europe Nov. 20-25

For two days, German policy makers tried to explain away the disastrous bid-to-cover ratio of their Benchmark 10-year offering blaming the low level of yields and market uncertainty. Germany, the atlas of Europe, is not invincible and the market whispers of contagion to the core are strengthening as systemic risk multiplies. Capital markets seek leadership and ownership and the lack of them has the EUR under renewed pressure, so much so that the FSA has mentioned to UK Banks that they should be making contingency plans for a Euro break up.

Kind of ironic that the Bundesbank hold a chunk of their failed 10’s while arguing that the ECB cannot be a stop gap?

Hungary getting downgraded to junk and a poorly received Italian Bond auction that saw the country’s borrowing costs double have the dollar ending the week firmly higher. Again this week has global investors trading in the dark, strapping on risk aversion trading strategies, while shying away from CHF on market rumor that the SNB was to raise their floor. It’s like a triple witching hour on the hour!

Below are some other highlights of the week:

EUROPE

• The week started with the US Super Committee headlines adding to Euro worries. The committee was close to admitting failure ahead of Monday’s self imposed deadline for announcing a deficit reduction plan. With a shortened US trading week, a deal was still possible ahead of Wednesday’s planned committee vote. Their inactions added to market concerns about “policy gridlock in the major economies at a delicate time for financial markets”.
• Euro systemic risk currently trumps, pressurizing risk positions, supporting bonds and the dollar and yen.
• Euro politics: Italian and Greek PM’s met with the EU Commission President on Monday. In Spain, the conservative PP party reported a landslide victory in weekend elections, setting the scene for a stable government with commitment to fiscal reform.
• Euro-political developments not enough to reassure positive bond market activity. The absence of an aggressive ECB encourages players to stay away.
• EUR: Moody’s issued a warning to France. A continued deterioration in conditions could prompt it to shift the outlook on the country’s AAA rating to negative at some point.
• CHF: Money supply (M3) and mortgage growth rose to multi-year high levels. M3 growth rose to +8.2%, y/y, last month, from a downwardly revised +7.9% in the prior month. It was largely driven by a sharp rise in sight-deposits in their banking system. Mortgage growth surged to +5.2%, y/y, in September and was above +5% for the first time in seven-months.
• GBP: Rightmove house prices index fell -3.1%, m/m, this month, and supports calls for further BoE QE. Sterling continues to underperform.
• EUR: Contagion fear in Euro sovereign markets remain, with French and Spanish 10-year yields trading close to their upper range and Italian yields continuing to tick higher from last weeks lows.
• Mid-week Euro rhetoric remained dovish. Political opponents to Merkel’s government stated that she does not have plans for a “new bazooka” to deal with the sovereign crisis. Comments from EU Commissioner Rehn and Eurogroup President Juncker suggested only slow movement towards a Eurobond structure at best.
• CHF: Swiss exports remained robust last month, up +1.3%, m/m, in real terms. The trade surplus increased to CHF +2.15b. Despite CHF strength and weakened demand from the Euro area, the cumulated year-to-date surplus exceeds the surplus last year by +15%. Export comes at the expense of profit margin. This week’s stronger data argues additional easing or implementation of a higher CHF “floor” by the SNB for now.
• NOK: GDP grew +0.8%, q/q in Q3, above the consensus for +0.7%. Revisions also lifted Q2 growth to +1.3% from +1.0%, q/q. Analysts argue that the details of the release were less positive, with consumption slowing to +0.2% from +0.8%, q/q in Q2, driven by soft durables.
• IMF: Announced that their Board approved two new lending tools were member countries can borrow ten times their contribution.
• EUR: Most pressing is the news that the German 10-year offering “failed” this week. The issue received only EUR3.9bn in bids, well short of the EUR6bn on offer. Analysts are explaining away the “unsubscribed” auction given the low level of yields and market uncertainty. Germany, the atlas of Europe, is not invincible and the market whispers of contagion to the core are strengthening as systemic risk multiplies.
• EUR: Fitch rating agency says the Euro crisis is threatening Frances triple ‘A’ rating.
• EUR: German officials remain adamant in their opposition to a Eurobond program, and with ECB bond purchases remaining less than overwhelming suggests further dollar appreciation.
• IMF: The market believes that the new IMF facilities announced are not sufficiently large to provide more than a supporting role in ending the contagion cycle in the Euro area.
• EU: The composite PMI surprised to the upside at 47.2 vs. the 46.1 consensus forecasted, but remained below 50 for a third consecutive month. Manufacturing PMI declined further to 46.4 from 47.1 last month, below the consensus for 46.5. The weakness in manufacturing was shared both in France and Germany.
• EU: French services PMI recovered to 49.3 from 44.6 and German services PMI rallied to 51.4 from 50.6. With the composite PMI in contraction territory suggests that Europe’s “growth prospects remain poor, adding challenges to fiscal sustainability”.
• GBP: The BoE MPC members voted unanimously to maintain the current QE program (9-0), in line with expectations. They believe it would be difficult to increase the monthly pace of asset purchases. Some members believe that an expansion of the program may become warranted. Market is eyeing an increase in QE once the current program in completed in February.
• EC3: Poland’s finance minister confirmed that the NBP (Polish central bank) intervened in markets in support of the zloty. Fearful that excessive zloty weakness would feed inflationary pressure.
• EUR: Portugal implements a general strike.
• Fitch Credit Agency: Portugal’s credit rating has been downgraded to junk status with a negative outlook.
• FSA: Baily stated that UK banks should make contingency plans for Euro-break up.
• EUR: PM Monti indicated that Italy’s deficit targets may have to be adjusted to Econ cycle.
• EUR: Merkel again strongly declared that Germany still sees no reason for Euro-bonds.
• EC3: Hungary was downgraded by Moody’s to junk (Ba1, below investment grade). This was done because of “the rising uncertainty surrounding the country’s ability to meet its medium-term targets for fiscal consolidation and public sector debt reduction, particularly given its increasingly constrained medium-term growth prospects” and “the increased susceptibility to event risk stemming from the government’s high debt burden…”
• EUR: A lackluster Italian auction triggered further sell-offs in the bond market with Italian 10-year yields rising to +7.327%, this after selling EUR8b in 6m-bills and EUR2b in two-year bonds.
• EUR: If that was not enough, Italian retail sales dropped more than expected -0.4%, m/m, compared to the -0.2% expected by analysts.

Other links:

AMERICAS Week in FX

ASIA Week in FX

 

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