Euro Bounces On Greek News, Now Looks Ahead To ECB Meeting

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The following is a post by Marc Chandler, global head of Brown Brother Harriman’s top ranked Currency Strategy Team. For more of BBH’s currency views, please visit the BBH FX website here.

Highlights

  • The US dollar was largely weaker vs. the majors as optimism picked up regarding Greece (see below).  EUR/USD traded at its highest level since Feb 17.  Sterling bounced too and outperformed ahead the euro so EUR/GBP eased slightly.  While euro was helped by new Greek budget measures, we would look to sell euros and sterling into strength but acknowledge that market positioning (record high EUR and GBP net shorts on IMM last week) could see further near-term dollar losses.  Yen was mixed but dollar/yen fell to its lowest since mid-Dec.  Biggest gainers on the day vs. USD were ZAR, RON, GBP, PLN, and HUF, while only losers vs. USD were COP, NZD, and TRY.  EM currencies were mostly firmer.  COP softened after central bank announced daily USD auctions of $20 mln in H1 to limit peso gains.  ECB, BOE meetings will be watched for clues on exit strategy and QE, respectively.       
  • US equity markets were mixed, with DJIA, S&P, and NASDAQ down 0.1%, flat, and flat on the day, respectively.  European markets were higher, though, as DJ Euro Stoxx 50 ended up 0.9%.  Asian equities are likely to open up today as Asian ADRs were higher during N. American trading Weds.  Nikkei futures point to a down open for Japan and falling dollar/yen could hurt Japan exporters.
  • US bond market was down, as 2- and 10-year yields were up 2 bp and 1 bp, respectively.  European bonds were mixed, with 10-year yields in UK, France, and Germany up 1 bp, 2 bp, and 2 bp, respectively.  In the periphery, Greek 10-year yields fell 17 bp, Portugal fell 1 bp, Italy was flat, and Spain rose 2 bp.  UST issuance is light this week after last week’s heavy auction schedule.

Currency Markets
ADP private sector jobs report and the employment component of the ISM services index improved but we still see a risk that Friday’s payroll report falls by more than -100K.  That compares with the current consensus for a -58K drop.  The ISM index rose to 53.0 (vs. 51.0 exp) and forward looking new orders rose to the highest level since Aug 07.  The employment component remained in contraction territory but improved to 48.6 (from 44.6), the second highest reading since the component fell below the 50/50 boom/bust level in Jan 08.  While that suggests that the pace of layoffs is slowing, only 2 of the 19 industries included in the survey reported an increase in employment.  The improvement in these two sectors – retail and transportation – may not be reflected in the payroll data.  Both sectors likely experienced some interruptions when the storms hit which is also when the payroll data were collected.  Nine sectors reported declines in employment including the social assistance and public administration.  Some noted state budget issues had seen positions go unfilled suggesting government related jobs may be on the weak side in the payroll report Friday.  That’s in contrast to the ADP private sector report (which came in as expected at -20K in Feb) which excludes public sector jobs.  There is another reason why the payroll numbers may be worse than the ADP report implies.  ADP Chairman Joel Prakken, speaking during a post data release interview, did remain optimistic that hiring will pick up in the next few months as companies grow less hesitant to hire workers.  However, he warned this Friday’s payroll data could be weaker than ADP data due to the recent storms.  While payroll numbers are based on whether people worked during the period when the storms that hit during the payroll data collection period, weather doesn’t have much impact on the ADP data according to Prakken.  Prakken’s comments underscore our view.  The impact on the currency market of a worse than expected payroll report may not be long lasting given that the losses during the storm are likely to be reversed as the weather improves.  The key for the recovery in the jobs market is twofold: there is already evidence that one leg – layoffs – is slowing. However, the second leg – job creation – remains subdued and is contributing to the weakness in payrolls.  The market will also be looking for evidence that job hiring is picking up.  Feb ADP report showed mid-sized firms actually hired a net of 10K, the first gain in two years. 

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As widely expected, Greece announced another package of savings, roughly split between tax hike and spending cuts, that projects to save another 4.8 bln euros, which is roughly 2% of GDP.  The measures are harsh, but it is still too soon to expect Europe to provide anything but verbal support and solidarity.  Nor can there be any money forthcoming from the Greek PM visiting the German Chancellor on Friday.  The key now is implementation.  As we have argued, that is why March 16 is important.  It is the first status report of the implementation.  In Jan, due to one-off corporate tax, Greece appeared ahead of plan.  Many of the initial efforts by Greece appeared aimed at showing immediate results.  This is the Catch-22.  If Greece is indeed implementing its programs and the social unrest and deeper economic contraction and higher interest rates have not offset it, Greece may not require financial assistance…yet.  On the other hand, many European officials appear to be more sympathetic to material support if Greece was committed (know through implementation) to its austerity plan.  In addition to the Greek news, note that there is talk that the ECB may announce at its meeting willingness to lend back to the market the covered bonds it has been buying.  Also given the large net short position among non-commercials at the IMM futures, which we assume to be largely representative of many short-term speculators and model driven accounts, and talk now the US Justice Dept may investigate talks of hedge fund collusion may have favored some paring back of short euro exposure.  Also note that the US jobs data on Friday may be a wild card in the deck.  It is difficult number to forecast even in the best of times and weather appears to have played havoc with a number of recent economic reports.

Turkey’s inflation accelerated substantially in February, but this was mainly the result of one-off factors and is unlikely to trigger a monetary policy response at the March 18 meeting.  The central bank is likely to wait and see whether this latest surge in inflation corrects. In February, the CPI jumped by a further 1.45% m/m (+0.64% was expected), adding on to a 1.85% m/m increase in January and y/y rate climbing to 10.13% from 8.19%. This higher than expected inflation outturn resulted from surging food prices (+52.9% y/y, mainly weather related) and tax increases coming in effect in February, but it also confirmed the upward inflation trend recently as inflation has risen every single month since hitting a 39 year low of 5.1% last October.  Core inflation was also on the rise, at 4.1% y/y from 3.8%. Note that the central bank is aiming at bringing the yearly inflation rate to 6.5% by year-end and a tighter monetary policy (current rates at 6.5%) will have to be delivered in order to achieve this. We do not expect the first rate rise to be delivered before mid-year but future CPI data will have to be closely monitored.  The Turkish Lira had a difficult couple of weeks, with political concerns weighing following numerous detentions of former senior military officers in connection to an alleged coup plot.  We continue to see TRY weakness as a good medium-term buying opportunity, supported by relatively favorable growth prospects, improving fiscal position, and an overwhelming yield advantage.  We expect TRY to strengthen into Q2 (1.44 target) and see outperformance versus CZK and HUF, with last year’s highs (13.982 on TRY/CZK, 145.497 on TRY/HUF) to be tested again. 

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This material has been prepared by Brown Brothers Harriman & Co. (“BBH”) and is intended for information purposes only.  This communication should not be relied upon as financial, investment, tax or legal advice.  This communication should not be construed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.  This information may not be suitable for all investors depending on their financial sophistication and investment objectives.  The services of an appropriate professional should be sought in connection with such matters.  The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed. Sources used are available upon request. Any opinions expressed are subject to change without notice. Please contact your BBH representative for additional information. BBH’s partners and employees may own currencies in the subject of this communication and/or may make purchases or sales while this communication is in circulation.

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