Week in FX Europe Feb 12-17

This weeks highly anticipated teleconference meeting only produced ‘sound bites’, allowing another day to be wasted and another day closer to default. The next Euro finance meeting is this coming Monday in Brussels. It’s here that the market again will hope for more clarity on a potential Greek third tranche timetable. The aggressive squeeze put on the weaker EUR shorts in the final sessions of the week has been caused by the Greek government believing that a “deal” is done. Failure to get a second +EUR130b bailout after next Monday’s Euro finance ministers meeting will again provide a market license to sell the single currency as Greece enters election season without funding.

Below are some other highlights of the week:

EUROPE

• EU: Greek parliament approves austerity measures in a late Sunday vote, temporarily allowing the EUR to retrace all the previous Friday’s losses. A majority of the two main parities voted in favor, although more than 40 MP’s from these parties either voted no or abstained.
• EU: Greece had to identify +EUR300m in additional austerity measures to offset pension reforms it rejected last week.
• EU: In after hours trading on Monday, Moody’s downgraded Italy and Spain and revised the outlook to negative for France and the UK’s AAA rating. Spain’s rating was cut to A3 from A1, Italy was lowered to A3 from A2 and Portugal was reduced to Ba3 from Ba2 with negative outlook. The ratings of Slovakia, Slovenia and Malta have also been cut.
• GBP: UK inflation moderated last month with headline inflation falling to +3.6%, y/y, from +4.2%. Core goods inflation fell to +2.6%, y/y, from +3.0% with a flat seasonally adjusted reading on the month. The drop in core was due to lower services inflation and suggests somewhat smaller inflationary pressure.
• GER: German ZEW surprised much stronger than expected with the expectations component jumping to 5.4 from -21.6 (highest level in 10-months). Current situation assessment increased to 40.3 from 28.4. This has been a less reliable indicator, but this strong pick up bodes well for this month’s PMIs and IFO due next week.
• EU: Euro-zone, IP contracted -1.1%, m/m, in December and in line with consensus. Meanwhile GDP data showed a sharper slowdown continued in the periphery. Portuguese GDP contracted -1.3%, q/q, in Q4 following a -0.6% decrease in Q3. Greek on the other hand GDP fell-7% in Q4.
• HUF: Hungarian headline inflation spiked to +5.5%, y/y, in January from +4.1%.The sharp rise is attributed to a VAT hike last month and the pass through effect from a weak currency. The market should expect the Central bank to see this as a ‘once-off’ price adjustment. Policy makers remain preoccupied with today’s deadline to respond to the EC objections to recent legislation on Cbank independence.
• EU: The Euro-zone economy contracted in Q4 (-0.3%, q/q) for the first time in two-and-a-half years, as nine member states posted a fall, while five entered a recession. This would suggest that the impact of the debt crisis continues to bite and it’s probably prudent to suggest the remaining regions, apart from Germany will follow in Q1. Germany remains the most likely outlier, but not an economy large enough to shoulder the rest of Europe. EUR bears continue to find better levels to short the region again.
• CNY: PBoC governor Zhou asserted that China specifically and the BRIC countries more generally are willing to support the euro area, but are waiting for the appropriate time to do this. China could support the euro area through the EFSF or IMF with funding from the central bank, China’s sovereign wealth fund, or China’s development banks.
• GRE: The three main party leaders have agreed to personally sign off on the latest austerity measures imposed by Troika. Final approval of the program is now not expected until next Monday’s Euro group meeting. The markets will then be watching and wondering what the uptake of the swap among investors will look like.
• GBP: The BoE inflation report showed inflation at around +1.8% in two-years under the assumptions that the Bank Rate moves in line with market interest rates and the size of the asset buying program remains at +£325b. The prediction is much higher that +1.27% forecasted last November. Less risk of further debt monetization means that the GBP can potentially attract more official flows. Sterling remains attractive as an alternative currency to the EUR.
• UK: The unemployment rate remained at +8.4%, while the claimant count rose slightly to +6.9k from +1.9k, a touch above the consensus forecast for +3k.
• HUF: The MNB introduced new credit facilities supposedly to facilitate an expansion in bank lending to the corporate and household sectors.
• CZK: The Czech Republic entered a recession in Q4, with a second consecutive contraction of GDP. GDP fell -0.3%, q/q, following a -0.1%, q/q drop in Q3.
• EU: General risk attitudes ebbed and flowed on Thursday, as fears that the second Greek bailout talks were showing signs of an impasse, pushed the EUR to a three-month low.
• Moody’s: The agency is reviewing credit ratings for 17 major financial firms, and that a new wave of downgrades is imminent.
• Fixed Income: Despite stronger than expected French and Spanish bond auctions demand midweek, periphery yields continue to tick higher.
• SEK: As expected, the Riksbank cut interest rates by -25bps to +1.50% followed by a dovish statement. With the Repo rate path revised lower, no further rate hikes are being priced in until 2014 at the earliest. Policy makers remain uncertain about future rate growth and have revised growth forecasts higher for 2014 while lowering near-term forecasts. Domestic inflation was weak last month with the headline rate falling to +1.9%, y/y, from +2.3%. Core-inflation also remains subdued at +0.9%.
• NOK: Norway’s mainland GDP grew +0.6%, q/q, in Q4, beating the +0.5% expectation.

AMERICAS Week in FX

ASIA Week in FX

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