Week in FX Europe 15-20 July

This is now officially very ugly. Spain revising growth targets, Valencia looking for a handout and Spanish 10’s making it near impossible to fund has tentative risk positions entered this week on the back foot. All this is allowing the dollar and yen to end the week in demand. Policy makers are desperately trying to rid any perception of Spanish insolvencies. ECB is not helping its own currency or investor confidence by not accepting Greek bonds as “collateral at this time.” Price action in the wake of this week’s SA-MPR by helicopter Ben highlights the extent to which market participants continue to be uncomfortably short risk-sensitive currencies.

Below are some other highlights of the week:

EUROPE

• GER: Germany’s Constitutional Court said it will issue a ruling on the constitutionality of ESM on 12th September. While a delay was expected, this remote date ensures that a degree of uncertainty over bailout mechanisms will linger through the summer. The mechanism for lending to Spain to support bank recapitalization also remains a subject of discussion.
• EUR: The euro zone inflation was stable in June at +2.4% y/y, in line with the flash estimate. Core inflation was also stable at +1.6%. VAT increases might cause some upside move in inflation, but with weak activity we do not expect this to have a material impact on ECB policy.
• GBP: UK’s Rightmove house prices dropped by -1.7%, m/m in July, compared with +1.0% increase in June. Prices increased moderately by +2.3% in July, compared with +2.4% in June.
• EU: Weaker US fundamentals has suggested markets are increasingly viewing data as raising QE prospects and by default the single currency is finding some support.
• GER: German ZEW economic sentiment indicator came in slightly better than expected at -19.6 vs. a -20 consensus midweek. Perhaps a run of upside core-surprises alongside a Fed QE response and a quiet period in Europe could allow for a squeeze on dollar longs?
• GBP: UK inflation fell to +2.4%, y/y, from +2.8% below consensus for a flat monthly read. The decline was driven by lower oil prices. Even Core-inflation happened to soften, falling to +2.1%, y/y, from +2.2% previously. This is likely to have the BoE considering easing measures, but for now analysts expect a pause to evaluate impact of recent initiatives is likely.
• GBP: The BoE minutes surprised dovish, as MPC discussed rate cut, despite 7-2 vote count for QE extension. The possibility of a base rate cut was discussed and that any decision on this will be delayed for “several months” so that the impact of the Fund for lending scheme (FLS) and Extended collateral term repo (ECTR) can be assessed.
• ESP: This week’s auctions gave us mixed results. The Spanish bond auction results were close to being somewhat horrid and technically another bad result for Madrid. It resulted in borrowing costs again jumping sharply, and demand for the debt falling. However, the only glimmer of comfort is that Madrid did manage to raise a total of +€2.9b, close to their desired maximum amount, but, the market made them pay up.
• FRF: On the flip side, France managed to sell sovereign debt at remarkably low cost. French treasury happened to sell +€4.5b of five-year debt at an average yield of just +0.86%, a record low. This is a solid result, and a sign that France, despite its economic challenges, is still considered a contender for safe haven activity.
• Papers: El Pais indicated that Spain may be able to use a portion of its +EUR 100b aid package not needed for bank recap to buy back debt.
• GBP: UK retail sales ex-fuel rose +0.3%, m/m, in June. The stronger results may be impacted by the extra bank holiday or was it the summer discounts on cloths and footwear? Despite sale volume increasing momentum remains weak.
• TUR: Turkey’s central bank left policy rates unchanged, as expected, and maintained its “cautious stance” adopted in the June statement. It reported that they still have room to “inject liquidity within the current rate corridor.” The central bank has adjusted its reserve requirements, raising the amount that can be held in foreign currency by +5% which will increase liquidity in the market as well.
• GER: German lower house backed a euro-area bailout of Spanish banks after Finance Minister Schaeuble gave assurances that Spain will remain liable for the aid and parliament will be consulted on each step of the rescue.
• ESP: Spain revising growth targets, Valencia looking for a handout and Spanish 10’s making it near impossible to fund has tentative risk positions entered this week on the back foot allowing the dollar and yen end the week in demand.
• BBLG: Bloomberg reports that the country’s plan to offer cash-strapped regional administrations emergency loans leaves the Treasury with €12bn of additional funding needs.
• GBP: UK’s Public Sector Net Borrowing requirements ex-interventions data surprised on the weak side at +£14.4b in June, furthering expectations that the government might not be able to meet the +£120b yearly deficit target for 2012.

AMERICAS Week in FX

ASIA Week in FX

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