G10 Currencies
EUR: Yesterday the Eurogroup gathered in Brussels. The EMU finance ministers touched three broad areas:
(1) Bailout package for Portugal. The statement brought not much of a surprise. The volume is EUR 78bn – as expected. The equal split between IMF, EFSF and EFSM also is no surprise. The only surprising formulation in the statement is the Portuguese government’s pledge to “encourage private investors to maintain their overall exposures on a voluntary basis.” This seems so obvious that one may easily be willing to interpret something more dubious into this phrase. But most likely, it is the usual “EU speak”, the kind of formulation that quite often slips into statements as a result of the inter-governmental bargaining process.
(2) Process enhancement. No decision was made on any of the pending issues: ESM legal text, increase of EFSF volume, etc.: all these issues have again been postponed.
(3) Greece. In its usual polite way, the Eurogroup pushed Greece in two dimensions: (a) The government has to push its privatisation program. (b) The opposition parties have to make clear that the austerity program is based on broad national consensus. Furthermore, it was interesting that Eurogroup President Jean-Claude Juncker publicly discussed the possibility of debt restructuring. In “EU speak”, this is labelled “reshaping”. But it now is in the catalogue of measures that might be adopted after the June review of the Greek program.
Minor additional issues included the formal proposal of Mario Draghi as new President of the European Central Bank and Klaus Regling’s information about the issuance policy of the EFSF.
Conclusion for EUR exchange rates. As this meeting did not bring much new information, one might easily conclude that it should not have any impact on EUR exchange rates. But yesterday was another lost opportunity for the Eurozone governments to end living a lie. The European institutions still act as if there were an opportunity for Greece to get out of its debt crisis by means of austerity measures. But that is not possible. Greece would need a long-run primary budget surplus beyond 10% of its GDP. Trying to reach such an unrealistic goal is economic nonsense. Every measure not aimed at reducing the country’s debt burden is therefore not leading to a sustainable solution, but is merely some form of muddling through.
The Eurogroup hinted at ways to continue this approach: Increased privatisation efforts and a “broad national consensus” seem to be sufficient for a new round of Greece aid even if the June assessment will lead to disappointing results. Therefore, the recent phase of Greece-induced EUR weakness might come to an end then. Until then, however, the EUR might experience some more nasty weeks.
AUD: The Reserve Bank of Australia‘s (RBA) minutes confirmed that after a one-year pause it will resume its tightening cycle sooner or later. It even pointed out explicitly that “higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target“ – provided that economic conditions continued to evolve as expected. While the appreciation of the AUD is probably dampening inflation at present, according to the MPC members core inflation is nonetheless likely to rise to the top end of the target corridor (2-3%) by the end of this year. On the whole the RBA sounded hawkish. The positive effect of the meeting minutes on the AUD was only moderate though. The RBA’s direction is clear, but not the exact timing of the next rate hikes. Hence, the market hasn’t adjusted its rate expectations significantly so far. We expect the next rate hike in July.
GBP: Today’s inflation data for April is likely to demonstrate that the surprise fall in the March inflation rate to 4% was by no means the beginning of a trend reversal. On the contrary according to the last week’s Bank of England’s inflation report inflation might even reach 5% later in the year. So price pressure is unlikely to ease over the coming months. Only if today’s publication surprised notably (markets expect 4.1%) is it likely to have an effect on Sterling. Otherwise news regarding the euro zone are likely to dominate market events.
Emerging Market Currencies
HUF: Nothing has changed then. As expected the Hungarian central bank left key rates unchanged yesterday and as expected it stuck to the “inflation may fall back close to 3% by the end of 2012 even without further monetary tightening”. As had been predicted the effect on EUR-HUF was hardly noticeable. Central bank governor Andras Simor considered the previous three rate steps to be sufficient. This view is unlikely to change before the publication of the new inflation report. So interest rates are therefore unlikely to support the forint in the near future.
RUB: Russian economic growth has eased off in Q1 2011 and at 4.1% yoy came in slightly below expectations. That means that the positive trend seen in Q4 2010 (4.5% yoy) did not continue. Even if the oil revenue is flooding the country this does not solve the problem of structural weakness due to a lack of investment. In the run-up to the election words are unlikely to be followed by action. Long term the investment climate will remain a decisive factor for positive, sustainable growth though.
ZAR: Since the last rate meeting the South African rand was mainly driven by external factors, but today some important local data is on the agenda. Consumer prices for April are likely to record a further rise in the rate of inflation. According to consensus the yoy rate is expected to rise from 4.1% the previous month to 4.4%. In its statement the central bank had pointed out that the current pricing pressure was of external nature and that it would only react in case of second-round effects. It also pointed out that there were upside risks regarding its inflation outlook. Should today’s inflation rate come in well above expectations markets are likely to see this as an invitation for rate speculation. At the same time retail sales due for publication today might provide some further momentum. The recent economic data was not persistently convincing so that a stronger figure today would cause optimism.
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