BBH CurrencyView: Euro Recovers, Good Selling Opportunity
The euro has recovered from yday’s low, but the risk remains strongly tilted to the downside and so this is a good selling opportunity (see below). The EU Fin. ministers have disbursed the first tranche of loans to Greece (roughly Eur18bn), but we still do not have much in terms of details on the modalities of the recent Eur750bn package implementation (see below). EU’s Juncker stressed that it is not the value of the euro that it is of concern, but the pace of the euro’s decline – it makes sense. Germany’s April Zew index disappointed, but no surprise on the CPI front. Cable has softened towards $1.44 support, with the stronger than expected UK CPI data having only a short-lived supportive effect (see below). The yen consolidated within recent ranges. The Aussie continues to underperform and the latest RBA minutes provided limited support – confirming a pause in the tightening cycle. Kiwi outperformed, Q1 PPI stronger than exp. The Swiss franc is trading on a slightly softer note following remarks from SNB’s Hildebrand who indicated that the flight from the euro to the franc threatens price stability and the recovery outlook – intervention risk is high. EMEA currencies look in better shape but remain vulnerable should we see further euro weakness. Turkish CB Mtg (see below), US April PPI/housing starts, 2nd day of EU Fin Min mtg. Fed’s Pianalto to speak.
It was all mixed for the Asia equity market overnight. The MSCI Asia Pacific index was down 0.3%, with mixed regional performances. The Nikkei was up 0.1% but lower sessions were seen on the Kospi (-0.5%) and the Taiwan Taiex index (-0.2%). The Shanghai SE (+1.36%) and the Shenzen SE (+1.64%) recovered from yday’s severe selling, led by bank shares. European have had a more encouraging morning, with the Cac-40 (+1.1%), the DAX (+0.95%) and the FT-SE 100 (+0.6%) all trading higher by mid day. Crude oil prices were up 1.6% by midday, snapping a 5 day decline.
The JGB bond mkt was down for the first time in three sessions as the mkt has adjusted to a calmer mood. A five year JGB auction showed solid results, even if the bid to cover ratio (at 3.11) did not match the previous month’s (at 4.65). The European bond market had a mixed morning, with 10 year bond yields trading up in the periphery while core EZ bonds were pretty flat. UK Gilts underperformed following the stronger than exp. inflation figures (10 yr Gilt yields up 4bp).
The euro has recovered from yesterday’s losses but the overall sentiment remains shaky and we identify selling opportunities close to the $1.25 mark. On the downside, we have support at $1.2280 and then $1.2235. Note that the euro is still trading well below its 5 (1.2465), 10 (1.2596) and 20 (1.2926) day mav. Meanwhile, EZ Finance ministers have confirmed that it is not the current euro level that is of concern, but the pace of the recent sell-off. This makes sense, but this is a problem very difficult to address for a policy maker, unless one considers the Fx intervention channel. Unlikely to be on the agenda for now. The other dilemma facing euro zone policy makers relates to the fact that a weak euro is actually what the economy needs at this point. Today, the EZ finance ministers are meeting for the second day, financial regulation is on the agenda. We note that we still do not have much detail regarding the modalities of the Eur750bn EU/IMF package implementation and in particular on how will the EUR440bn loan guarantee scheme work in practice. We know that a special purpose vehicle entity will be created to raise the money if needed and that a unanimous agreement will be required to enact the programme. We still do not know how will the money be raised.
In the meantime, Germany’s ZEW disappointed this morning. The main index was reported at a weaker than expected 45.8, down from a 53.0 monthly outcome previously and well below the 47.0 expected outcome. This was the largest monthly decline since the post-Lehman debacle period. No reason for panic though: this is an investors’ sentiment index and not an economic indicator, so this poor reading says nothing about the current and/or expected EZ growth profile. Friday’s IFO index will be more relevant in that respect. Bottom line is that investors’ confidence has obviously been affected by the Greek debt crisis and a shaky sentiment may persevere in the near-term. Indeed, it seems obvious that the mkt has not been impressed by the EZ policy makers’ response so far. Meanwhile, the euro zone April CPI confirmed that inflation is a non-issue in the EZ (April reading at 1.5% y/y, unchanged on the month) and the ECB’s sterilized bond purchases operations will ensure that inflation does not become an issue. Inflation is a little more of an issue in the UK in the n-t and this was captured by the April CPI out this morning and reported at a stronger than expected 3.7% y/y (from 3.4%). This means that for the fourth consecutive month, UK inflation ran above the 3% level. The MPC has revised its very near-term inflation profile to the upside in last week’s report, but a higher CPI is mainly seen as a temporary phenomenon. However, we note that there is a risk that at some point, the higher headline inflation rates fuel inflation expectations. This could eventually lead to a more hawkish monetary policy outlook, which combined with a tighter fiscal outlook could prove highly detrimental to the UK economy and to sterling.
It should be wait and see for the sixth consecutive month at the Turkish central bank today, but the bias is towards higher, not lower interest rates. Nominal Turkish rates are (along with South Africa) the highest in the EMEA world and an upward bias is in place. This means that the current and expected yield differential remains overwhelmingly bullish for the Turkish lira in the near-term. This argument is valid against the forint (Hungary is now cutting rates) – look for TRYHUF to test our 145.497 resistance target (last year’s high) imminently and with further resistance at 152.669 (February 08 high). It is a similar story on TRYCZK. In the Czech Republic, the central bank has recently cut interest rates (to 0.75%) – consistently with a bullish TRYCZK outlook. Look for last year’s high (at 13.982) to be tested again soon. EMEA currencies traded on a slightly firmer note overnight, with international factors (and in particular the Greek debt crisis and associated contagion fears) continuing to be the main driving force and leaving EMEA currencies highly vulnerable at this point.
Upcoming Economic Releases
America: US April PPI, housing starts. Canada’s March international securities transactions. Events: EU Finance ministers meeting. Fed’s Pianalto to give a speech. US Treasury Geithner visits Boeing plant.
This was the BBH CurrencyView by Marc Chandler. Marc is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.
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