Week in FX Europe May 20-25

Euro leaders have had limited affect after this weeks EU summit. The single unit continue to slide, repeatedly printing new year lows on contagion fears with a Greek exit. Policy makers are already shifting discussion and focus to next months summit. Behind the scenes, Italy’s Monti believes he is capable of swaying Germany, bringing her around to act in Europeans “common good.” Merkel may be opening a door to a compromise on debt sharing in the euro area. Before any of this occurring, next Thursday the Irish will hold a referendum on whether the government can ratify the EU fiscal compact. Recent polls suggest that a yes is a win, however, there is a relatively large number of undecided voters. If the electorate make this a personal issue and an attack on the Irish government’s handling of the current crisis, then a ‘yes’ could be a tough pill to swallow.

Below are some other highlights of the week:

EUROPE

• EU: Last weekend acknowledgement of a need for policies to support growth at the G8 summit appeared to temporarily support risk sentiment at the beginning of this week. However, the summit stopped well short of endorsing specific policy frameworks and has allowed the G8 meeting to end with little success in determining the next step to calm the EZ debt crisis. This endorsed risk profit taking to set the tone at the beginning of the week. The final G8 statement declared that jobs and growth were imperative but that the “right measures are not the same for each of us.”
• FRF: President Hollande outlined Frances pro-growth measures this week to other EU leaders, and it was he who introduced the Eurobond proposal.
• GR: Greek opinion polls will now be a major market focus until next month’s election. Polls released over last weekend were mixed, with 3-polls showing the ND slightly ahead and two polls showing Syriza leading. Expect market stress to remain elevated and the EUR on a weakening trajectory heading into the elections absent a more decisive turn away from Syriza in the polls.
• UK: Rightmove house prices were unchanged in May after rising +2.9%, m/m, in April.
• TRY: Turkey’s CBank declared an “exceptional day,” tightening liquidity to support the domestic currency after 5 days of “normal” operations.
• GER: German officials temporarily cooled off hopes for an official shift in favor of Eurobonds, by denying speculation that the issue would be discussed amongst a summit of EU leaders. However by weeks end, Italy’s Monti is confident that he capable of swaying Germany.
• EU: Euro leaders were to discuss a new set of proposals at the summit, including Eurobonds to finance infrastructure, and several growth oriented proposals. German officials denied any talk of Eurobonds, but stated that EU leaders discussed the issuance of project bonds.
• GBP: UK CPI fell from +3.5%, y/y, to +3.0%, below consensus at +3.1%. The decline was largely on the back of base effects from transport and particularly air fares. The market expects expect GBP to remain well supported against EUR as long as Euro peripheral stress levels remain elevated.
• NOK: Norwegian mainland GDP rose +1.1%, q/q, in Q1 after a +0.8% rise in Q4. The growth was fairly broad based, with solid gains in consumption and gross fixed capital formation, but with the latter primarily in the oil and gas sector, rather than in the domestic economy. Without a shock from Europe and a sharp move in NOK, the Norges is unlikely to ease any further, following the surprise December cut.
• BoE: The May MPC minutes were less “dovish” than expected. Members voted 8-1 to leave the QE program unchanged, despite the dovish May inflation report prompting expectations that more members could join Miles in voting for further asset buying.
• BoE: The decision on asset purchases was considered “finely balanced” for several members. The minutes also state that further appreciation of GBP could increase the likelihood of more easing. The IMF suggested this week that the BoE consider boosting the program and consider cutting key interest rates below the +0.5% threshold.
• UK: UK retail sales ex-fuel surprised weak, falling -1.0%mom, worse than consensus expectations for a 0.7%mom decline.
• EU: EZ flash PMI surveys showed further deterioration in the core economies from already low levels. German manufacturing PMI fell to 45.0 from 46.2 and French manufacturing dropped to 44.4 from 46.9 (much worse than consensus). Services PMIs were flat on the month in both countries at 52.2 and 45.2.
• EU: The EZ whole composite PMI fell to 45.9 from 46.7, the worst reading in three-years.
• GER: Business expectations fell two points to 100.9 and the largest fall in 12-months. The data strongly suggests a slowing growth momentum in Germany. Analysts note that sentiment fell across all sectors, with a particularly large hit to the retail industry business climate (down to -3.6 from 10.7 previously).
• Fr: French business confidence has deteriorated, with the Insee indicator falling to 93 from 95. With weakening Euro data, does it warrant pricing in a-25bp ease over the coming months?
• EU Summit: Euro leaders achieved little and have mostly pushed key decisions to next month’s summit. They maintained the call on Greece to stick with the budget cuts and offered no immediate relief for Spain. The leaders agreed to give the EIB the mandate to draw up proposals for ‘growth’ for next month’s summit but disagreed over Euro bonds.
• HUF: The government has confirmed that the parliamentary vote on the required changes to the contentious central bank law is scheduled for June 4. Expect formal negotiations to follow soon with the IMF.
• CZK: Czech business and consumer confidence both deteriorated this month. Business confidence fell to 6 from 7.5 while consumer confidence dropped to a record low of-31. Expect further Euro growth risks to affect CE3 currencies.
• EU: Ending the Euro week, German data is showing consumer confidence index defiantly steady this month at 5.7, with the overall indicator forecasting an identical reading for June. It seems that German households are openly portraying a bout of resilience of confidence, despite the recent financial market turmoil and the whispers of an exit strategy date for Greece. Even the French have bought into this upbeat mood. Their consumer confidence print has risen 1 point to 90 on Friday.
• GR: Recent Greek polls are showing support for the anti-bailout Syriza party rising to +30%, raising concerns about the capacity of new elections to produce a market friendly government.
• PLN: Polish retail sales fell -2.4%, m/m, in April, taking the annual growth rate to +5.5%, y/y, only. Market can expect the Polish Cbank to hold the line on rates in the short term.

AMERICAS Week in FX

ASIA Week in FX

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