We have a similar landscape with two different CBank stories occurring this week. The ECBâ€™s policy easing could be viewed as increasing the attraction of the single currency as a funding vehicle against higher yield emerging market currencies. The fears of systemic risk aside, expect the market to use the EUR to fund growth currencies when volatility and carry become elevated. However, with PMIâ€™s flashing a Euro systemic warning signal perhaps we should expect growth-sensitive currencies to have a tough time of it in the long hot summer days. On the other hand, the BoE decision to increase its AP program should not have too much of a negative effect on its own currency. So far, the CBankâ€™s ability to monetize will be seen as less negative by capital markets. UK sovereign debt is better debt than the Euro-zones so owning sterling is less risky than owning EURâ€™s.
Below are some other highlights of the week:
- EU: Risk sensitive currencies started the week on the right foot, gaining traction along with global equities. However, by weeks end, the same risk currencies have finished firmly on the left foot, loosing traction.
- EU: Euro-zone PMIs beat low expectations in the UK, Switzerland and Turkey. The June data was revised up from the advanced estimate, so that it now reads flat at Mayâ€™s 45.1, erasing a dip to 44.8 originally reported for last month. Not a surprise, continued disappoint was recorded in Spain and Italy with a modest deterioration on the month.
- GBP: UK construction PMI surprised very weak in June falling to 48.2 from 54.4. Analysts note that itâ€™s the lowest reading in two-years. BoE data showed foreigners sold -Â£1.6b of gilts in May, following -Â£1.3b of net sales in April.
- EUR: German factory orders rose +0.6%, m/m, in May, above consensus for +0.0%. The previous month was revised higher to -1.4% from -1.9%. The relative strength in the report came from export orders and particularly euro- zone orders which rose over +7% on the month.
- EU: As expected, price action was muted ahead of CBank announcements on Thursday. But when everything was revealed, the gloves finally came off.
- BoE: The CBank will buy an additional +GBP50b of gilts beginning next week, joining the ECB and PBoC in easing policy as the Euro debt crisis weighs on global economic growth. The QE announcement is spread over four month and seems to have disappointed those who were looking for more. The new bout of QE will see the rate of gilt buying exceed supply each month.
- ESP: The theme of Periphery bond yields keep climbing, and again is hurting capital markets risk attitude.
- ECB: Euro policy makers broke that psychological barrier and cut rates -25bp to +0.75%. The deposit rate has now dropped to zero and the marginal lending rate to +1.5%.
- ECB: Draghi reiterated that risks to economic growth remained on the downside. He also stated that the decision to cut rates had been unanimous. â€œWe continue to expect another -25bp repo rate cut by the end of Q3 but we also anticipate this cut to then be accompanied by a narrowing of the corridor to +/- 50bp.â€ Draghi admitted that the ECBâ€™s collateral framework would have to be revisited and that as long as banks were solvent, the ECB stands ready to provide them with the liquidity needed.
- ECB: Policy makers must be hoping that the combination of recent EU summit announcements and rate cut will buy them some quite time over the summer. As they approach the zero bound policy makers will have to start considering other non-conventional measures. The policy easing is basically increasingly the single currency as a funding vehicle against higher yield emerging market currencies.
- EUR: Despite one of the ECBâ€™s better efforts to halt a slide to rising periphery yields their attempt has failed with Spanish and Italian yields blowing out again as confidence in the Spanish financing markets plummets. Weaker US data has only aided the process so far.
- GER: German IP rose +1.6%, m/m, well above consensus for a +0.2% print. The strength was broad based with manufacturing production up +1.8%.
- NOK: Norwayâ€™s manufacturing production was also strong, up +0.5% in May, above consensus for -0.1% drop. The market remains weary of business surveys continuing to point to further risks to growth.
- CHF: SNB reserves were up +CHF 61b last month and follows the +CHF68b gain in May. Analysts note that after adjusting for exchange rate movements this was the largest quarterly intervention in three years. Swiss FX reserves now stand at +63.3% of GDP.
- HUF: After numerous previous delays the Hungarian parliament has finally passed the CBank law. When the ECB and IMF have assessed the amendments positively it should not be long before an IMF mission arrives in the country.
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