Week in FX Europe June-10-15

The Greek elections this weekend can accelerate the rise in market stress. Investors are going into the weekend cautions given Sunday’s election in Greece in which the radical left Syriza could win the election. However, analysts note that even with the extra 50 seats that go with winning first place, the left will not have a majority and will have to convince a partner to join it in order to form a government. This may be difficult and a third election may be required to break any stalemate. With no opinion polls legally allowed in the two weeks before the election means no one really knows the true strength of the various parties heading in. Syriza leader Tsipras says he intends to keep Greece in the Euro-zone. However, his deafening refusal to accept the bailout terms could get Greece cut off from further bailout money and could even get Greek banks cut off from ECB funding, which would cause them to collapse immediately. The Euro’s next chapter begins on Sunday night.

Below are some other highlights of the week:

EUROPE

• ESP: Spain started the week managing to get their credit line with preferential treatment from the Euro-group who agreed to informal Spanish bank recapitalization aid request. The amount that they could end up borrowing may not reach the +EUR100b number being thrown around. Obviously, it will be a number that will influence the country indebtedness. All the market was concerned about was if the bailout was a market game changer? Spanish assistance would be provided by the EFSF and/or ESM to recapitalize their financial institutions.
• EU: The impact of the financial gesture will depend on the bond market. If FI view this as improving Spain’s long-term debt sustainability and Spanish bonds rally, there could be a more prolonged recovery for sentiment. Thus far, investors remain dubious of the overall affect.
• ESP: The Spanish aid request is likely to exert pressure on the country’s ratings. If the +100b is used, then the country debt to GDP would jump to around +90% from +81%.
• EU: Ex-Spanish window dressing, the data on the Euro front remains bleak at best. French IP rose +1.5%, m/m, in April. Digging deeper, it had a weak manufacturing component, contracting -0.7%, m/m.
• NOK: Norwegian inflation rose to +0.5%, y/y, from +0.3%, in line with consensus. However, underlying inflation surprised higher than expected at +1.4%, y/y, up from +0.7% previously. Analysts expect the domestic economy to remain resilient, supported by higher oil prices. This would not require any further easing intentions from policy makers.
• ESP: Spanish yields keep climbing, printing record currency bloc highs as Fitch questions policy makers ability to demonstrate they can bring the Euro debt crisis under control.
• SEK: The Riksbank’s company interviews show weak sentiment in the export industry. The exporting companies were troubled by the uncertainty regarding developments in the euro area and while they seemed somewhat hopeful that economic activity will improve over the next six months, they saw currently few concrete signs of an improvement.
• GBP: UK data supports further easing by policy makers. UK industrial production was flat in April. Other data revealed that manufacturing production contracted -0.7%, m/m, well below the expectations for -0.1%. The RICS House price index stayed negative at -16 in May. Analysts remain optimistic that sterling will continue to outperform the EUR in an environment of continuing euro zone stress.
• SEK: Swedish headline inflation moderated to +1.0%, y/y, in May from +1.3% and in line with expectations. Core inflation fell to +0.9%, y/y, from +1.0%. Subdued inflation leaves room for the Riksbank to ease if necessary. Expect FI traders to use continuing Euro stress to elevate that probability.
• ESP: Spanish Prime Minister Rajoy is again calling on the ECB to buy Spanish bonds under its SMP program to bring down Spanish bond yields. The +EUR100b bailout is not doing its magic.
• ITL: Italy sold -EUR6.5b billion of 1-year bills, its maximum target, at a yield of +3.972%, up from +2.34% at the previous auction on May 11. Completing the sale was a step in the right direction. Due to the relatively low risk on shorter-term securities it was never going to be a hard sell.
• EU: Mid-week risk got a bid, mostly for short covering reasons and not new risk positional.
• GR: In an open editorial to FT, Syriza leader Tsipras penned a piece titled “I will keep Greece in the euro zone and restore growth.” However, expect markets to view a Syriza victory as elevating exit risk and a significant risk negative.
• EU: Euro-zone IP fell -0.8%, m/m, better than consensus expectations for -1.2% decline. Analysts remain concerned about the region’s growth outlook, commenting that further easing measures by the ECB will become necessary.
• GER: Markets remains weary of Bund yields moving higher. Are we beginning to see Euro-sis metastasizing?
• EUR: Some European names continue to sell Bunds and buy treasuries, tightening spreads, made easier with this week’s US supply. Are they trying to get ahead of QE3?
• ESP: Spanish bank report to show +EUR70b needed (within the range of the planned EFSF/ESM aid package) gave the market a lift mid-week. Final report is due on Monday. FX dynamics continue to suggest the market is quite short risk heading into the weekend elections in Greece and vulnerable to a center party wins.
• ITL: Italy successfully auctioned €4.5bn of 3’s and 7-year paper, the top end of its planned range.
• CHF: Following its meeting, the SNB confirmed its policy to defend the 1.20 floor with “utmost determination” by buying foreign currency in “unlimited quantities”. The Swiss franc is still high and further appreciation of the franc is deemed to have a “serious impact on both prices and the economy”. On the back of Q1 strength, the SNB raised its 2012 growth forecast from “around” 1% to “around” 1.5%, but expects a “significant economic slowdown over the rest of the year.“
• EU: Euro zone headline inflation was 2.4%yoy, unrevised from initial estimate. Core inflation remains stable at 1.6%yoy. The fall in headline inflation from earlier levels around 3.0%yoy as well as lower oil prices should on the margin leave the ECB more comfortable to embark on further easing.
• EU: Markets open a tad calmer Friday on reports that Central banks have contingency plans to provide liquidity on a coordinated basis if extreme volatility emerges after Sunday’s Greek election.
• EUR: Euro-zone Q1 employment fell -0.2%, q/q, and -0.5%, y/y. The regions April trade surplus (seasonally adjusted) rose to +EUR6.2b from a revised +EUR3.7b in March and was larger than expectations of +EEUR4.2b rise.

AMERICAS Week in FX

ASIA Week in FX

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