Week in FX EUROPE: Is the ECB’s OMT enough?

The ECB’s “big gun”- unlimited bond buying or OMT could end up backfiring. The Euro-zones political and economic uncertainty has not disappeared. The Spanish still have not asked officially for a handout. This is a precondition for the ECB to buy Spanish government bonds. It is Europe’s fourth largest economy and for obvious reasons, remains reluctant to hand over sovereignty to any Euro bureaucrat. Event risk will be heightened again next week. A German court ruling on the ESM is due on the 12th, along with the Dutch election. There is always Greece and Italy continuing to simmer in the background. Do not be surprised to see some moderate EUR pull backs ahead of any of the aforementioned events.

Below are some other highlights of the week:

ECB Bond Buying Plan

• The week started with expectations for new monetary stimulus from the US Fed dominating price action. How long is this expected to last?
• EUR: The single unit got an initial lift from Draghi’s comments, who reportedly told a closed hearing that the ECB could operate in the 3-year and closer sector of the bond markets without serious risk of monetary financing.
• ECB: Kept rates on hold and promised sterilized open ended purchases of short maturity government bonds to keep borrowing costs down. The program is to be called “Outright Monetary Transactions.”
• EUR: The ECB bond buying plan (OMT) has brought significant stress relief for financial markets.
• ECB German Official Defends Bond Buying Plan
• Draghi to deliver bond plan at crunch ECB meeting
• ECB will not limit Bond Buying in Latest Crisis Proposal
• Draghi’s Press Statement Sept 6 2012
• Merkel Approves of Bond Buying Plan

EUR

• GER: German factory orders rose %2B0.5%, m/m in July, a touch stronger than consensus for %2B0.3%. It does not compensate the %2B1.6%, m/m fall in the previous month and weak PMIs and Ifo.
• EUR: Euro area services PMI was revised down to 47.2 from the flash estimate of 47.5. The composite PMI revised down to 46.3 from 46.6, still a bit above the May lows of 46.0. The breakdown, Spanish services PMI rose to 44 from 43.7 and Italy to 44 from 43.
• IRL: The IMF announced that Ireland successfully has met all mid-year performance targets under its %2B$30b bailout program clearing the way for the next disbursement of funds. At the same time, Moody’s lowered Ireland’s local and foreign currency bond ceilings to A3 from Aaa citing financial and economic risks in the country.
• GER: German IP rose %2B1.3%, m/m in July, stronger than consensus for a flat read. Last month was also revised higher, to –0.4% from –0.9%. However, PMIs continue to send a negative signal for future months.
• Moody’s puts European Union on notice
• France to Cut Spending by 10 billion EUR
• Hungary Optimistic about IMF Deal in Fall

CHF

• CHF: Swiss Q2 GDP contracted –0.1%, q/q, much weaker than consensus expectation for %2B0.2% gain. Growth in Q1 was also revised lower to %2B0.5% from %2B0.7% initially. Weak growths, soft leading indicators, including a disappointing PMI print, and a lack of inflationary pressure supports the SNB to keep the 1.20 floor unchanged at next week’s meet.
• CHF: Swiss headline inflation was flat in August, a touch below consensus for a %2B0.1%, m/m rise. The annual rate of deflation at –0.5%, y/y was also a touch below consensus for –0.4%, y/y. With deflationary pressure likely to remain strong the SNB can afford to remain dovish.
• CHF: SNB’s FX reserves rose %2BUSD11b in August, showing notable deceleration from the average %2BUSD60b monthly accumulation pace over May – June.
• Swiss Central Bank Intervened Less due to ECB

GBP

• GBP: UK businesses are less pessimistic about the economy as the Lloyds business barometer rose to 10 in August from –8 in July.
• BoE: The "old lady’ left its key interest rates on hold (%2B0.5%) and did not announce any new bond purchases (%2BGBP375b). Policy makers are expected to take further action to boost the UK stagnant economy.
• GBP: UK IP bounced %2B2.9%, m/m in July following the Jubilee holiday induced %2B2.4% fall in June.
• UK Financial Regulator Tells Banks to Cut Euro Breakup Exposure

Scandinavia

• NOK: Norway’s manufacturing PMI fell to 48.7 last month, from a revised 49.1 print in July. This was well below consensus for 50.1. So far the Norwegian economy has been relatively resilient supported also by investment and oil prices.
• SEK: The Riksbank surprised the market with a –25bp rate cut, bringing down the repo rate to 1.25%. The Euro economic downturn was cited as the main driver.
• NOK: Norway’s manufacturing production rose %2B0.3%, m/m in July, above consensus for –0.3%.

AMERICAS Week in FX

ASIA Week in FX

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