Week in FX Europe Feb 5-10

Despite the EUR’s sell off in the final trading session of the week, the single currency has managed to regain some lost ground against most of the G10 and EM currencies. Analysts agree that the “policy process and the firewall thats been built around Greece” have been contributing to the “excessive degree of benefit of doubt” which in turn has helped promote this move.

However, other factors in the background have also been aiding this trade. The dovish Fed message is leaving the dollar vulnerable. Certainly the one directional lemming trade, being short the EUR, is leaving the right hand side rather ‘naked.’ These weaker shorts have allowed the market to gravitate towards the short term EUR top.

What will be the next pressure point for the EUR? As we continue through the PSI process and into the next three-year LTRO program we will probably get to see the EUR trade again on the back foot.

Below are some other highlights of the week:

EUROPE

• EU: The week started with Merkel and Sarkozy stating that “time is running out for Greece”, why are we always waiting for another day?
• EU: Markets began the week trading with a “moderately risk-negative tone” as the after effects of last weeks US employment report wore off and Greece entered the crosshairs.
• GER: German industrial orders rose +1.7%, m/m, in December, above the consensus forecast of +1.0%.
• GRE: Over the weekend, Greek leaders agreed on spending cuts worth +1.5% of GDP, but reportedly a number of issues demanded by the Troika remained unresolved.
• CHF: SNB postponed its release of its FX reserves from Monday until Tuesday. The FX reserves reveal whether or not the central bank intervened or rolled over its forward contracts in January.
• EU: Even an agreed deal between the EU/IMF, Greece and the IIF would likely only result in a short-lived bounce in the Euro. Once a deal is reached, expect the markets to focus on the degree of actual participation in the swap by bondholders.
• GER: German IP declined -2.9% in December, much weaker than the consensus forecast for a flat print. Although November production was revised slightly higher to +0.0%, m/m, (from -0.6%), annual growth of German IP fell to +0.9%, y/y. This is its weakest level in three-years. It suggests growth risks for Q4. In contrast, forward indicators (Ifo and PMI’s) indicate some stabilization in Q1.
• NOK: Norwegian manufacturing production declined -0.3%, m/m, after a +0.2% rise in November.
• SNB: Vice-president Jordan reaffirmed the SNB’s commitment to defend the floor, and noted that they would take further measures if needed (ruling out a dip below 1.20). “We won’t tolerate any trading below the minimum rate in the relevant inter-bank market, and this commitment applies at any time, from the moment the market opens in Sydney on Monday to when it closes in New York on Friday.”
• EU: ECB is moving towards a plan whereby Greek debt holdings would be swapped with the EFSF at cost and then swapped back to the Greek government.
• PLN: As expected, the NBP kept rates on hold at +4.5%. MPC members suggest that the central bank welcomes the recent gains in the zloty, as it helps to alleviate inflation concerns. At the same time, a stronger zloty allows the MPC to wait for further clarity on any EZ developments.
• CHF: SNB foreign currency reserves fell to +CHF227b this month, down from +CHF254b in December. The data is consistent with no SNB intervention, but rather by swap contracts entered into in December.
• GBP: UK’s BRC shop price index rose +1.4%, y/y, the lowest rate of change in two years and down from a +1.7% in December.
• ESP: Spanish 10-year yields continue to back up after this week’s placement of +EUR4b of new paper by way of syndication.
• GBP: UK manufacturing production surprised strong with a +1.0%, m/m, gain in December, well above the consensus for +0.2%. This would suggest further evidence of growth momentum in the UK had picked up going into the year-end.
• GBP: It was no surprise, the BoE added +GBP50b to its QE program and kept rates on hold (+0.5%). Market still favors the GBP over EUR for the next few month.
• ECB: After keeping rates on hold (+1%) Draghi signaled the economic outlook has improved, suggesting policy makers may be less inclined to add to stimulus as Greece agree on austerity measures to secure a bailout. This would suggest that with a more optimistic outlook, a March rate cut is still possible but far from certain.
• EU: European finance chiefs are set to defer ratifying a +EUR130b rescue package for Greece. Their objective is to pressurize the Greek government to put a newly struck austerity plan into action by dotting the ‘i’s and crossing the ‘t’s ahead of legal approval.
• GRE: Greece is now subject to two days of general strikes in retaliation to its government austerity approval.
• EU: Risk assets are again on the back foot on concerns of Greek talks roadblocks.
• EU: Euro finance ministers have agreed to hold back Greek aid. The ministers have dismissed the +EUR3.3b Greek budget cuts as incomplete and are demanding another +EUR325m of cuts and parliamentary approval of the reform package plus pledges from political leaders that they will maintain their commitment after April’s Greek election. If this is done then finance ministers would reconvene next Wednesday to sign the loan agreement.

AMERICAS Week in FX

ASIA Week in FX

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