G10 Currencies
EUR-USD: Rumours regarding a new rescue packet for Greece are abounding since it has become clear that there is an additional funding shortfall in the Greek budget.
Even though IMF and EU had agreed on an aid packet worth a total of EUR 110bn., in the meantime yields for Greek bonds have more than doubled compared with May 2010 and Greece is unlikely to be able to return to the capital markets by next year as had originally been intended. Additional poignancy was added by the IMF’s threat to withhold payment of the June tranche if the financing for Greece for the coming 12 months could not be secured. The publication of the so-called troika’s (consisting of EU, IMF and ECB) report in which the three judge the progress of the Greek savings efforts will be an important mile stone in this context. The payment of the June tranche, which has so far been withheld, depends on it. The head of the Eurogroup Jean-Claude Juncker made it clear yesterday that the report, which is expected to be published over the coming days, will not contain any details on a further bailout packet for Greece. A solution is frantically being drawn up in the background. The different points of view of ECB (no debt restructuring), Eurogroup (Vienna initiative) and individual states (Germany: involvement of private investors in further Greece aid) are making an agreement on the additional aid packet even more difficult. According to Juncker it will take until the end of the month before a final decision will be taken.
FX markets responded positively to the Greek Prime Minister George Papandreou’s announcement of further savings worth EUR 6.4bn. as well as further privatisations, so that the euro was able to continue its downtrend against the US dollar. Hardly surprising. The US dollar has very little to offer at present. US economic data has been surprisingly bad for some time. The ISM PMI index, the Chicago Conference Board index for consumer confidence, the Chicago PMI and the GDP revision, it would be easy to extend the list further. In this environment Moody’s warning of a possible rating downgrade was just a drop in the ocean. All this data was not just worse than consensus expectations, it was worse than at least 90% of the analysts polled had been able to imagine. The recent US data illustrates a dramatic collapse as compared to the idea of a rapid recovery which convinced only 6 months ago. But the bad indicators listed above would be irrelevant if the US labour market was able to avoid this trend. As a result today’s labour market report from the US is the highlight of the week on the data front.
One would be forgiven for thinking the fact that EUR-USD did not react to the ADP report was a sign that the FX markets have now priced in negative data surprises and that therefore a disappointing NFP result would no longer matter. But experience teaches us that the ADP report is a bad indicator of FX market reaction. Chart 1 demonstrates: extremely large surprises in the NFP almost always cause high exchange rate volatilities. This is not the case for the ADP. If the ADP report is as extreme as was the case on Wednesday FX markets clearly take a wait and see attitude whether this is confirmed by the NFP (which is often not the case). Conclusion: even if EUR-USD did not react to the ADP report a notable surprise in the NFP would probably cause a notable reaction of the USD exchange rates.
JPY: Prime Minister Naoto Kan will remain in office. Following Kan’s announcement that he wanted to step down in the autumn or early next year at the latest he survived a vote of no confidence with a majority of 293 to 152 yesterday. The failed vote of no confidence is nonetheless unlikely to calm things down. The governing party DBJ (Democratic Party of Japan) remains split and the opposition is unlikely to give in so easily. As a result political uncertainty in Japan is likely to continue for some time, so that the yen will continue to be unsuitable as a safe haven in times of high risk aversion.
Emerging Market Currencies
TRY: The list of difficulties faced by the Turkish central bank (CBRT) is not getting any shorter. Consumer price data for May is on the agenda today, these are likely to reflect global inflation developments now, showing a higher inflation rate than the previous month. The CBRT’s inflation target of 5.5% is unlikely to be reached. We therefore assume that the central bank will start a rate reversal over the coming months. The fact that it did not raise the minimum reserve requirements at the last rate meeting on 5th May is pointing that way. That does not mean that the central bank did not consider a tighter monetary policy to be necessary but signals that it is considering the use of its other monetary policy tools, i.e. key rates. This is good news for the lira. The local currency is however only likely to recover once risk aversion eases notably and the CBRT clearly communicates the rate reversal.
CZK: Czech retail sales for April are likely to shed some light on the current status of the economic recovery. Consensus expects 1.8% yoy growth. Only a clear surprise is likely to lead to the koruna breaching its current range as in May the central bank provided a clear dampener to excessive growth and rate speculation with its dovish inflation report.
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